Thursday, June 10, 2010

What Does A Real Bottom Look Like?

Hi guys,

Got a question from a fellow member on what makes for a "real" market bottom. While we might be forming a bottom down here(anything is possible). Market bottoms take a long time to form but the most important character of a major market bottom is VOLUME and FOLLOW THRU.

The market needs to show an ability to rally in front of tremendous pessimism, skepticism, doubt and an almost 'depression' type state among investors/traders.

Markets needs to show an ability to rally and close on HIGHS of the day several days in proximity on good strong volume indicating institutional BUYING. Not simple short covering: Short covering is not enough: You need to see serious buying pressure where internals(advancing stocks handily beating out declining stocks) are solidly green several days in proximity. You wanna see 10-1 ratios for example: 10 stocks advancing for every 1 stock that is down on STRONG VOLUME. My personal favorite sign that we have a 'real' bottom is even after numerous strong up days, most traders/investors are still gun-shy to buy stocks thinking that stocks are going to tumble and this rally cannot be sustained. Refusal to recognize that a "real" turn has materialized. Or even better, when i see the majority of traders inclined to keep shorting even after the indexes are showing an ability to rally amidst "BAD NEWS".

In the attached chart i included the March 2009 bottom to illustrate this point.

Hope this helps.

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