- October 11, 2008
- Posted by: Ramki Ramakrishnan
- Category: S&P500
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.
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