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In Search Of Mr. Good Bottom
by Dave Elliott
www.WallStreetTeachers.com
If you are a long term or short term investor, a trader, or even a casual market observer, lately you have been forced to become quite familiar with market tops. For most of the past two years we have been introduced to many price topping formations as the market made all-time historical highs, and then reversed.
What we need now is to become familiar, BEFORE the fact, with the various bottom formations that occur before a market changes direction. We need to be familiar with these so that we can identify them if and when this market decides to stop going down. The market will eventually put in one of the many bottom patterns we have seen before, though it may not be a pattern that we are too familiar with in the most recent market bottom pattern history.
On 9/11 we saw the market go into a "V" bottom. Then in February, 2002, we saw a double bottom. Now it is probably going to get harder to find the ultimate "recession" bottom we were all expecting. More often than not the market likes to alternate patterns...you know, mix it up so we are totally confused.
Whatever bottom the market chooses to throw at us, we can still use our past experiences with market tops to prepare for the coming important bottom. "Trend lines" can be important in determining market turns after the bottom is put in. Daily trend lines are important, but the weekly trend line is critical. Looking at the weekly low of September and running a trend line along the February lows, it is visibly obvious that we broke the recent weekly six month up-trend line during the first week of April.
"Support and Resistance Lines" are also clues to bottom turn areas. Currently the DJ-30 support for 2002 comes in at the 9700 area. If that breaks, then support reverts to 9/11/01 lows of 8000. The next MAJOR support after that comes in at the 1998 lows of 7600. What will determine if the market tests the 1998 lows will be the strength, or lack thereof, of the economy. Historically, we know that 4 out of the last 5 recessions have had a "double dip," such as what we are seeing now, with the market in its "second dip" pull back.
Moving averages can also assist us, but again, they usually identify the bottom well after the fact, and their ability to be helpful is dependant on the length of the moving average that we chose to use. The longer the average, such as the 50 and the 200 day moving averages, the further away our trigger point is from the market bottom.
Candlestick charts can also give clues to a bottom. The general rule is that the candles usually become smaller and start showing long tails near major bottom turning points. Often we will see a "DOJI" where the opening and close for the week is the same price, or close to the same price. The NASDAQ has quite often given us the perfect DOJI bottom!
Looking at and plotting technical studies on market internals such as Advancing Vs. Declining stocks, McClellan Oscillators, and VIX volatility indicators, to name a few, can be helpful, but each of these indicators by itself is not conclusive evidence for action. However, the cumulative effect of these indicators could provide wonderful advance knowledge of an impending market bottom.
Without getting into the details of the hundreds of technical studies, cycle studies, or psychological analysis, we can look for more clues in those areas. The technicals can often give double or triple bottom divergences. Multiple cycle periods can bottom out at the same time. And, finally the psychology of the crowd behavior hits the "despair" level necessary for long-term market bottoms and their subsequent up turn.
EDITOR'S NOTE: Check out Dave's amazingly accurate daily market commentary at www.MentorMasters.net. It's free!
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