Stocks & Commodities V.

25:13 (14-22): Defining The Bull And The Bear by Chuck Dukas
TRADING TECHNIQUES

Analyze The Trend

Defining The Bull

And The Bear
Bullish and bearish are terms frequently used the need and practice of applied technical analysis to
to describe the price behavior of financial instru- determine and uncover market trends for successful
ments. What exactly do they mean?
decision-making.

DEFINITIONS

Bullish refers to upward price action, but not all

ll price action can be categorized into upward price action indicates further trend. To be
six phases of trends that describe the able to determine whether upward price action is
cycle of markets. You can apply this bullish, you need to view the price action in the
insight to any financial instrument on any time frame. context of what preceded the current price activity.
Although the principles will be illustrated with daily By comparing current price action to recent price
bars, you can utilize the concepts on intraday data, action and longer-term price action, you can classify
daily, weekly, or any time frames
current prices into specific
on commodities, stocks, or indexes
phases. This gives you an
All price action can be
categorized into six phases of
or in fact any financial instrument
objective definition of
trends that describe the cycle
subject to market forces.
price phase.
of
markets.
To be able to precisely categorize
There are a number of
all price activity into the six phases
ways to determine the
enhances your ability to assess the quality of the price context preceding the current price action. For simstructure of the instrument you are examining. You plicity, uniformity, and availability, we use moving
can take this one step further by categorizing price averages. Moving averages offer smoothing, which
with specific moving averages enabling you to statis- evens out the variability of short-term price movetically analyze price structure. In addition, this al- ment. They are also useful as comparative tools,
lows you to compare the quality of different instru- where a shorter-term moving average is compared
ments using specific criteria, enhance objectivity, to a longer length. This comparative feature means
and reduce subjectivity. Finally, but perhaps most price can be rated to both recent as well as longerimportant, it is a guide on how money can be de- term averages, meaning current price can be rated in
ployed in the markets; the core principles of trend the context of recent as well as long-term price.
analysis can be used in constructing trading systems Most important, the slope (direction) of a moving
or in adjusting capital exposure in an instrument average is an excellent tool for both trend and price
according to its phase.
phase analysis.
The blueprint of phase analysis will demonstrate
The classic definition of trend is a series of highs
and lows over time. Uptrends are defined as a series
of higher highs with a series of higher lows in
by Chuck Dukas
Copyright (c) Technical Analysis Inc.

Copyright (c) Technical Analysis Inc.

JACQUELINE KUDO

Stocks & Commodities V. 25:13 (14-22): Defining The Bull And The Bear by Chuck Dukas

Stocks & Commodities V. 25:13 (14-22): Defining The Bull And The Bear by Chuck Dukas

ET E Trade Financial - daily

27.12
26

24

An uptrend is a series of higher highs

and higher lows over a given time frame

22
21.41

Higher highs

20

Higher lows

18
50 PMA
16
200 PMA
14

12
60 Period channel
M

10
A

06

FIGURE 1: UPTRENDS. Here are higher highs and higher lows in a 60-period channel.

@DX.P(D) U.S. Dollar Index Continuous Contract (Jun06) Pit Weekly

A downtrend is a series of lower lows
and lower highs over a given time frame
120
Lower highs

110
200 PMA
Lower lows
100
60 PMA

PHASE DESCRIPTIONS
The descriptions will start with the beginning of the phase cycle. This can be compared to the movements that occur in a
bell curve. We start with the buy side and
cycle to the sell side. For simplicitys
sake, we will abbreviate period moving
average to PMA.

91.88

90

80.21
60 Period channel
2001

2002

2003

2004

2005

FIGURE 2: DOWNTRENDS. Here are lower lows and lower highs in a 60-period channel.

Copyright (c) Technical Analysis Inc.

2006

ALL CHARTS CREATED IN TRADESTATION

between (Figure 1); downtrends are series of lower lows and lower highs in
between (Figure 2). Our trend analysis
uses a 60-period channel (one earnings
reporting quarter on daily data) of highs
and lows to show when new highs and
lows are occurring. Price channel
breakouts are coincident with trend
initiation and continuation.
Arithmetically, a series of higher
highs and higher lows translates into a
moving average that will slope upward,
and as price action continues over time,
this will result in a longer-term moving
average sloping upward.
Using daily price data, we use the 50period simple moving average, which is
10 weeks of price action (or most of a
quarterly earnings reporting cycle). This
is sufficiently responsive to reflect the
changing dynamics of price behavior
without being influenced by short-term
swings. Next, we incorporate the 200period simple moving average (SMA),
which represents 40 weeks (just over
three quarters), capturing the longerterm dynamic of changing price behavior. I refer to these two indicators as
institutional rudders, demonstrating
distinct patterns of price behavior as
well as how the markets are steered
(Figure 3).
To summarize, we define current
as now, prices immediately preceding
now as recent as the structure embodied in the 50-period simple moving average, and long term as the structure
captured by the 200-period SMA. Putting these parts together leads to precise, specific definitions of price action
into six phases of price trend. I will
describe these phases in the typical sequential order of a cycle.

Stocks & Commodities V. 25:13 (14-22): Defining The Bull And The Bear by Chuck Dukas

SUN Sunoco Inc - Weekly

Recovery phase
Close > 50 PMA
Close < 200 PMA
50 PMA < 200 PMA

80

The recovery phase begins with the

close of current price above the 50 PMA,
but the close of price is less than 200 PMA
and the relationship of the 50 PMA is less
than the 200 PMA. In this price structure,
recent and longer-term price structures are
weak, but the current price structure is
strong enough to have overcome the recent weakness. In this phase, there frequently are no new lows in the price channel and the 50 PMA is losing (or has lost) its
downward slope. Because a downtrend is
defined as a series of lower lows with
lower highs in between, the absence of no
new lows in the 60-period channel is the
best evidence of the downward trend end.
Accumulation phase
Close > 50 PMA
Close > 200 PMA
50 PMA < 200 PMA

60

The "institutional rudders" are the 50- and

200-period moving averages. These two
averages demonstrate how the markets
are steered.

50 PMA
40

200 PMA
20
The transition point displays the change
in slope. This signifies when price potentially
changes its trend.
2001

2002

2003

2004

2005

2006

FIGURE 3: THE INSTITUTIONAL RUDDERS. Here are the 50- and 200-period moving averages with transition
point or slope change.

As price begins to stabilize or improve, the close of the

current price is above both the 50 PMA and the 200 PMA.
However, the relationship of the 50 PMA is still less than the
200 PMA. This defines the accumulation phase. In this phase,
current price is sufficiently strong to be above recent price and
longer-term price but the recent price structure has been weak
relative to the longer-term price structure. In this phase, youll
see new highs frequently in the 60 period channel, the slope of
the 50 PMA is upward, and the 200 PMA slope is losing or has
lost its downward slope.

upward-sloping 50 PMA, which is above 3) an upward-sloping

200 PMA (both of which lag but define this phase). Above all,
continued new highs in the 60-period channel both confirm the
uptrend as well as lead the 50 PMA and 200 PMA to continue.
Warning phase
Close < 50 PMA
Close > 200 PMA
50 PMA > 200 PMA

Bullish phase
Close > 50 PMA
Close > 200 PMA
50 PMA > 200 PMA

The characteristic of price activity is at the highest level of

positive phase analysis. I liken it to going into battle with a full
battalion of soldiers behind you, yielding your best chance of
success. We now have the current close greater than the 50 PMA
and the 200 PMA but most important, the relationship of the 50
PMA is greater than the 200 PMA.
With this definition in place, the analyst, trader, or investor
can then examine the quality of instruments in a bullish phase.
The characteristics of the highest-quality bullish phase are: 1)
A series of higher highs in the 60-period channel (coincident
with trend initiation or continuation), combined with 2) an

The warning phase is similar to the top of the bell curve. The
current close is less than the 50 PMA, but it is still a positive
close that is greater than the 200 PMA and the relationship of
the 50 PMA is greater than the 200 PMA. In this price configuration, current price is weaker than recent prices, but the price
structure historically has been relatively strong. Price below a
downward-sloping 50 PMA is a more severe warning than if the
50 PMA is still upward. With an uptrend defined as a series of
higher highs with higher lows in between, the absence of no
new highs in the 60-period channel is the best evidence of the
uptrend trend ending.

Copyright (c) Technical Analysis Inc.

Distribution phase
Close < 50 PMA
Close < 200 PMA
50 PMA > 200 PMA

Stocks & Commodities V. 25:13 (14-22): Defining The Bull And The Bear by Chuck Dukas

FIGURE 4: THE BUY SIDE. Here you see the recovery, accumulation, and bullish
phases of the buy side.

FIGURE 5: THE SELL SIDE. Here you see the different phases in the sell side of
the trend analysis diamond.

As price begins to weaken or decline, we now have the

current close of price below both the 50 PMA and the 200 PMA,
but the relationship of the 50 PMA is still greater than the 200
PMA. In the distribution phase, the 50 PMA is still above the 200
PMA, which means that although price is weaker than both,
there was sufficient recent action high enough for the 50 PMA
to still be above the longer-term average. The slope of the 200
PMA is losing shape. In this phase, there are frequently new
lows made in the 60-period channel.
Bearish phase
Close < 50 PMA
Close < 200 PMA
50 PMA < 200 PMA

FIGURE 6: THE TREND ANALYSIS DIAMOND. The diamond is made up of both

the buy side and sell side.

The characteristic of price activity is now at the lowest level

of negative phase analysis. The current close is less than the 50
PMA and the 200 PMA, but most important, the relationship
of the 50 PMA is less than the 200 PMA.
With this precise definition in place, you can then further
examine the quality of instruments in a bearish phase. The
characteristics of the bearish phase are: 1) A series of lower
lows in the 60-period channel, combined with 2) a downward-sloping 50 PMA, which is below 3) a downward sloping
200 PMA (both of which lag, but define this phase). Above
all, continued new lows in the 60-period channel both confirm the downtrend as well as lead the 50 PMA and 200 PMA
to continue down.

BUY-SIDE PHASES
Now that you know the definitions of phases, lets work on
combining them. The groupings of the recovery, accumulation, and bullish phases describe what is known as the buy
side of phases. Depending on the user, the buy side includes
entering long as well as exiting short (Figure 4).

SELL-SIDE PHASES
The groupings of warning, distribution, and bearish phases
describe what is called the sell side of phases. Sell side
includes exiting long as well as entering short (Figure 5).

THE SIX PHASES OF THE DIAMOND

The diamond methodology (Figure 6) helps analyze price
behavior as it changes over time. Markets will cycle between
bursts of intense price activity and periods of stability. This is
the natural flow of expansion and contraction of price cycles
through the six phases. The insights that the diamond provides
act as a compass in determining price strength or weakness of
any financial instrument that can be traded.
The diamond is broken into two equal and distinct sections.
The left side of the diamond is the buy side and the right side
is the sell side. There are six phases of price behavior in the
diamond: two clearly trending (bullish and bearish) and four
where the trend is less evident, where it could be ending or
beginning. The two phases where there are sharpest price
movement over time are referred to as bullish phase for the

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 25:13 (14-22): Defining The Bull And The Bear by Chuck Dukas

FIGURE 7: ONE-YEAR ANALYSIS. The Dow Jones Transportation Average occupied the bullish phase 77% of the
time. While being in that phase price accumulated 36 new 60-period channel higher highs, during that same time
period price was in the bearish phase zero percent of the time.

FIGURE 8: A 75-YEAR LOOK. The Dow Jones Industrial Average occupied the bullish phase 44% of the time. In
that phase price accumulated 1,833 new 60-period channel higher highs. During that same time period price was
in the bearish phase 19% of the time while making 507 new 60-period channel lower lows. Note that 63% of all price
activity occupied either the bullish or bearish phases.

uptrend and bearish phase for the

downtrend. If the market has exhibited
an expansion of trend over time, the
likelihood of a pullback could unfold.
The warning phase in an uptrend and
the recovery phase in a downtrend might
be signaling the start of what could be
the beginning of a countertrend move.
In the progression of market cycles,
markets move in a bell curve manner.
We begin to see buying interest followed by acceleration in price and volume. Price may then plateau; sellers
step in and begin liquidating long positions. This sets the stage for an increase
in selling activity, and then price will
decline until it establishes a floor for
support. Once a base is built, price levels out again, and the cycle of price
activity repeats itself.

STATISTICAL ANALYSIS
Armed with the knowledge of the phase
definitions, you can now statistically
analyze market strength and/or weakness. There are four tables of daily price
dataone year (Figure 7), 10 years, 20
years, and 75 years (Figure 8). These
tables summarize the phases in which a
tradable financial instruments price occupies as a percentage of time.
All tables are sorted with the bullish
phase being placed at the top. On the
buy side, when price is in the bullish
phase, a 60-period channel higher high
is accumulated only in that phase. The
sell side indicates when price is in the
bearish phase, accumulating each 60period channel lower low only in that
phase. The tables are divided for the
buy-side phases and the sell-side phases.

COMPARATIVE ANALYSIS

FIGURE 9: BULLISH/BEARISH PHASE COMPARISON. Procter & Gamble had the greatest safety based on bullish/
bearish phase comparison. SBC Communication had spent the least amount of time in the bullish phase.

Copyright (c) Technical Analysis Inc.

Now you are ready to compare various

financial instruments using this data.
For the comparative examples, the Dow
Jones Industrial Average (DJIA) equities (Figure 9) are ranked according to a
top-down approach to phase strength
and weakness over a 10-year span.
Procter & Gamble had the greatest safety
based on the bullish/bearish phase combination. P&G was in the bullish phase
56% of the time, accumulating 240 new
60-period channel higher highs. During
that same period, price was in the bear-

Stocks & Commodities V. 25:13 (14-22): Defining The Bull And The Bear by Chuck Dukas

ish phase 8% of the time, while

making 17 new 60-period channel
lower lows. Viewing the same (10year) period, SBC Communication
spent the least amount of time in
the bullish phase (32%), while accumulating 135 new 60-period
channel higher highs. During that
same time frame, price was in the
bearish phase 27% of the time
while making 73 new 60-period
channel lower lows.
Following is a 20-year view of
the strongest index compared to
the weakest equity (Figure 10).
The Standard & Poors 500 had
the greatest safety and strength,
while IBM lagged the overall market.
Drilling this comparative analysis a step further, the S&P 500
FIGURE 10: STRONGEST BULLISH PHASE VS. WEAKEST BEARISH PHASE IN THE DJIA. The S&P 500 occupied the
occupied the bullish phase 38% bullish phase 55% of the time and while being in that phase accumulated 617 new 60-period channel higher highs. During
more of the time than that of IBM, the same 20-year time span, price resided in the bearish phase 13% of the time, making 81 new 60-period channel lower
while making 294 additional 60- lows. IBM occupied the bullish phase 34% of the time, accumulating 323 new 60-period channel higher highs. During the
period channel higher highs. IBM same 20 years price resided in the bearish phase 23% of the time, making 130 new 60-period channel lower lows.
occupied the bearish phase 43%
more than that of the S&P 500 while making twice as many tion at risk. As price cycles to the bullish phase where safety
new 60-period channel lower lows.
and strength is at its optimum, another one-third position is
added bringing the exposure to a full position.
PHASE ANALYSIS AND
CAPITAL DEPLOYMENT
CONCLUSION
There are a variety of ways that you can apply phase analysis. Considered by many Wall Street pundits as the greatest trader
One way is to only have full long positions in instruments that who ever lived, Jesse Livermores quote some 75 years ago still
are in the bullish phase and full short positions in instruments holds the test of time: There is nothing new on Wall Street or
in the bearish phase, while having less capital exposed during in stock speculation. What has happened in the past will happen
the other phases.
again and again and again. This is because human nature does
For example, a full long position in the bullish phase could be not change, and it is human emotion that always gets in the way
logically reduced when the instrument passes from bullish into of human intelligence. Of this I am sure.
warning, and eliminated or further reduced if the instrument
As defined here, the phase analysis concepts will act as a
transitions into the distribution phase. From the short perspec- compass for making buy and sell decisions. They act as a guide
tive, a full short position could be in the bearish phase, and by mapping out how your capital can be deployed in the
reduced or eliminated when the market transitions into the markets, and showing you the basis on which to develop a
recovery or accumulation phases.
sound money management process.
On the flip side, if you are interested in going long, you could
The relationships of phase analysis reflect the realities that
enter a lesser initial position in the recovery or accumulation human behavior repeats itself and are inherently cyclical.
phases, increasing exposure as prices transition into the stron- Consequently, phase analysis is the relationship of price beger price phases. The given example deploys full positions in havior to the institutional rudders, again the distinct patterns
the safety and strength of either a bullish or bearish phase. of price behavior. Phase analysis is the ability to articulate and
Another approach could be laddering your position based on demonstrate the bearish and bullish market phases as you
the strength of the phase. You might choose to build a long- decide when to buy or sell. The quality of price is measured as
term position in a financial instrument. If that were the case, it expands or contracts through six phases of price activity.
then in the recovery phase where price begins to build its base Phase analysis offers you the ability to objectively define price
you would expose a one-third position.
behavior into specific categories by using a combination of
As price begins to stabilize or improve and makes its move readily available tools. Doing this allows you to statistically
to the accumulation phase, you would increase the exposure by analyze price structure.
another one-third position. You now have a two-thirds posiYou can also compare the quality of different instruments
Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 25:13 (14-22): Defining The Bull And The Bear by Chuck Dukas

using these specific criteria and visually recognize trend behavior, hence enhancing objectivity and reducing subjectivity.
Chuck Dukas is a principal in a hedge fund and president of
TRENDadvisor.com, a website that provides trading recommendations and education services to better equip the trader
to understand the markets and prepare them to trade independently. Dukas is past chairman of the New England chapter of
the Market Technicians Association.

Dukas, Chuck [2006]. The TRENDadvisor Guide To Breakthrough Profits: A Proven System For Building Wealth In
The Financial Markets, John Wiley & Sons.
Smitten, Richard [1999]. The Amazing Life Of Jesse Livermore:
Worlds Greatest Stock Trader, Traders Press, Inc.

RELATED READING

S&C

Copyright (c) Technical Analysis Inc.