|Is this what we've been waiting for since the swan
dive began in early 2000? Are we finally at the bottom
of this long bear market? If the news is good, it could
take months or years to answer that question.
we'll find out quickly if this isn't the bottom,
because the major averages will break the lows
and resume their selloffs.
In either case, let's take a quick primer on what to
expect "at the bottom." Perhaps it will give us a clue
about the end of our market misery.
Bottoms print as a result of market physics. Uptrends
and downtrends exhibit natural wave motion as
they thrust forward, and they pull back to test
gains or losses. This action-reaction becomes
very important at market turning points.
implies that a reversal pattern will appear at
some point in each trend. In an uptrend, a lower high will eventually follow a higher
high and mark a new top. In a downtrend, lower lows will
finally stop when price action prints a higher low. This
marks the birth of a bottom.
There are many variations on the theme, including
rounded bottoms, triple bottoms and V-bottoms. The
problem is, you never know what type you're in until
after the fact. The most common variation is the double
bottom, in which a market prints one higher low before
rallying out of a base.
Percentage profit potential peaks at the beginning of a
new uptrend. So being right at a bottom can produce a
significant reward. But bottom-picking can be dangerous
business. Make sure to weigh all evidence at your
disposal before jumping into a falling market, and apply
defensive risk management to ensure a safe exit if you
are proven wrong. For example, take losses immediately
if the prior low gets taken out.
Bottoms occur in downtrends. There's added danger
because traders will often believe a bottom before it's
confirmed by the price action. Fast execution can cost
you a lot of money in this volatile situation. Less
experienced traders should sit on their hands and let
others take the bottom bait. There will still be plenty
of good trades if and when the market moves higher.
Spectacular reversals offer little profit if price can't
climb out of the hole it fell into in the first place.
Keep a stop loss under the prior low, and consider an
earlier exit when the first bounce runs out of steam.
Price can gather downside momentum at broken lows as it
searches for new support.
Successful bottom-fishing requires a strong stomach.
Negative sentiment infects these turning points even
when the technicals line up perfectly. Why are we so
attracted to these trades? Being right at a bottom
offers a very high reward-to-risk ratio.
Bottoms produce very strong market fuel. There are fresh
longs ready to speculate, and short-sellers who don't
realize they're trapped. These two forces combine to
generate tremendous buying power that can trigger
explosive moves. For this reason alone, traders should
consider the virtues of bottom-picking.
Market declines evolve into market bases characterized
by failed rallies and retracements to old lows. Bear
markets end when strong hands finally shake out the last
So the time will come when price can rally to the top of
resistance and keep on going. Relative strength will
improve at this major turning point, and charts will
print bullish bars with closing ticks near their highs.
The averages will then start a steady march through the
wall, bloodied by previous failures.
Markets must overcome gravity to enter new uptrends.
Value players build bases, but they can't supply the
critical force needed to fuel strong rallies.
Fortunately, the momentum crowd arrives just in time to
fill this important chore. As markets rise above
resistance, greed rings a very loud bell, and growth
players jump on board all at the same time.