Oct 112008
 

All you have to do is to search in Google (< click here) and you will see a lot of people talking about market bottoms. Let me share with you a secret. If there is one single reason why I have lost money on some of my trades, it is because I had this vain notion of being able to predict accurately where a market will bottom out. It is actually easier to predict where a market will top out! You see, the easier way to make money is by trading WITH the trend. This means, in a downtrend, you should look to sell on rallies. I can help you identify what these low-risk sell levels are in a downtrend. Conversely, in an uptrend, we should be looking to buy on any pull back.

Back to calling a market bottom. There is a popular fallacy suggesting bear markets end with the shattering threat of financial castration, where all investors withdraw at the same time. Many wave analysts get this notion from the observation of abnormally vicious C Waves that are characteristic of bear markets following an extended Wave 5.  When people ask me if a catastrophic selling climax was the end of a market sell-off, I always tell them this. You seldom get a bottom when the volume is high. You may get a period of consolidation, during which the market recovers a bit (sometimes a lot). But bear markets usually go back down to make fresh lows, sometimes quite a while after the climactic selling took place.  You don’t have to go back to the 1930s to verify this. Consider the low of 9/11. Was that the real low? No. See this chart. snp500  At the bottom of the bear market in the United States in 1932 and in the United Kingdom in 1975, as well as in the US in 2002, there was only a whisper when the last private investor who intended to sell sold the last share he had to sell.

Let us examine the concept of volume a bit more carefully. When the price action becomes labored after a sharp rally, while volume contracts significantly, a trend reversal is indicated. When volume begins to contract during secondary rallying action, a continuation of the downtrend is indicated. A sharp one-day rally on low volume indicates short-covering. If volume refuses to expand within three days of the suspected climax, the climax will have been confirmed.

Related links:


What is the outlook for SNP500

SNP500 revisited

S&P500 and Citi

Fifth wave extensions can make you rich!

What is a significant rally in the stock markets?

Harmony in markets: S&P500

S&P 500: Potential Ending Diagonal Triangle

Ending Diagonal Triangle in S&P500?

S&P500 Elliott Wave update

S&P500 index: is a top already in?

S&P 500 update: where is the top?

S&P500 continues its rally

S&P500 remains resilient

S&P500 ready to dive?

S&P500 Update: May 19, 2009

S&P500 Elliott Wave update:21 May 2009

S&P 500 breaks higher: update 2 June 2009

  2 Responses to “Was that the stock market bottom?”

  1. Hi Ramki,

    Was going thru some old posts, as i was getting a feeling that somewhere amongst all the trading, i seemed to have lost the plot. so getting back to refreshing the basics.

    On this post i sort of disagree wrt high being relatively easier to spot compared to lows for the reason that generally (amongst retail, HNI, may be insti’s) buying is a staggered decesion whereas selling is one time (emotional).

    so what i do generally is use true ranges of such bars for stops as well as size of true range wrt previous for confirmtion that my trade is not premature. All said difficult to bet the ranches here,but can nibble thru.

    Regards,

    Ashwin.

    • Hi Ashwin, going through old charts is a great experience for learning. But if we attempt to do a post mortem of whether the counts were accurate, then it is a futile exercise because I can tell you upfront that eveyone’s count will be proved wrong sooner or later. The goal is to make use of the EWP to trade. Enjoy

 Leave a Reply

(required)

(required)