Significant market bottoms generally share many key characteristics. I like to see a spike in volume to get that last wave of selling in place. During this "panicked" phase, it's also important to see pessimism rise to a relative level where we can be fairly confident that a rally can last more than an hour or two. Obviously, oversold momentum oscillators like stochastics and RSI are in play at a bottom. My favorite momentum oscillator - the MACD - can provide clues as to the duration of any potential rally.
On the Dow Jones chart below, notice that the MACD is pointing straight down on the daily chart. It's unusual to see a long-term bottom form when momentum is so negative. So at this point, if the pessimism ramps up to a point where a bottom forms, I'd only be looking for a short-term rally to follow. In order to see a more sustainable rally ensue, I need to see this momentum slow and begin to reverse. That's where long-term positive divergences come into play. The market showed much more stability after the November lows and the positive divergence formed on the daily chart. Check out the Dow Jones chart above:
2 comments:
Did you look at the period between May and August? The MACD now looks like it is between May and July but it did rally till September, didn't it?
So, for a rally, should you always look for a sharp fall and a snap back? Does a "rally" for mean a 500+ point gain in 2 or 3 days? Should a rally be always resemble Oct and Nov like?
You posted a year chart but completely ignored the 1st part where there was slow drift to down from May to July and then slow up till September? I see bias in your reasoning. Most likely, you are still short. I don't find fault with you being short. But, don't show that bias in your arguement.
Y: read the top of the post. this analysis is done by Tom Bowley who is a member of the stockcharts.com team. this anaylsis is not mine, i just found it interesting enough to post it here on my blog.
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