Thursday, September 29, 2011

Stock Market Bottoms

Dot Com Aftermath
To the left is a chart of the end of the dot com collapse.  Although these are charts of the S&P 500 index, many, many technology companies either met their demise, or were left a fraction of their former selves.  As witnessed by this chart, they took the broader markets and the economy down with them.  The downward trend was broken, and the markets then charged upwards and onwards in 2003.

Financial Crisis
2008 was a bad year for the U.S. economy, and global markets, as seen by this chart of the S&P 500 index. Interwoven with the weekly price candles are three moving averages. The blue line is the 8-week, or 40-day moving average, the red is the 20-week, or 100-day moving average, and the green is the 40-week, or 200-day moving average. The bottom came in March of 2009, and, once more, the markets were headed higher.
Presently, we are teetering on the brink of a double-dip recession, with the fate of the Euro zone in the balance.

I invite you to study the first two charts very closely to see if you can identify something that would uniquely indicate a bottom in the market.  Once you have done that, take a look at the current chart to the left.  Do you see that same indication in the third chart after 2009, also?

The answer would be yes.  It occurs when the 50-day moving average crosses the 200-day moving average from below, and the trend in the price candles is rising.  (I  have to add the last part about the rising price candles as the 50-day did cross the 200-day for a three week period in April of  2002, and that, clearly, was not a bottom).  We also saw it, again, in October of 2010.

Here we have two major bottoms in the past decade, or so.  It has been my contention that once the price candles drop through the 200-day moving average, we should stop out of our long positions until the market has bottomed.  Yet we are told there is no telling when to get back into the market, or that we are likely to get in at the wrong time and out at a worse time.

Whether the bottom is the reversal from bear market to bull market, or if it is the bottom of a correction, the likes of which we experienced in 2010, it is a reliable and tradable indicator.  Now you know what to look for before putting new money at risk in these volatile markets.

Are you convinced?

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