The Trend is DOWN ... BUT could we be bottoming ???

Discussion in 'Trading' started by Bono, Jul 11, 2002.

  1. Bono

    Bono

    Having read about the DOW Theory some years ago, I remember one of the interpretations saying that the last phase of a BEAR trend is comprised of panic selling, and that the market is usually full of BAD fundamental news. So with WCOM, ENRON and the others, and the recent bleeding, there is NO QUESTION that the trend is DOWN, but could we be close to bottoming ??? I don't recall anyone said how long this particular phase lasts.

    What do you think ?
     
  2. Babak

    Babak

    If by bottom you mean a short term one (days to one week) then I would agree. Otherwise, I don't know.
     
  3. tntneo

    tntneo Moderator

    bear markets don't stop in V bottoms.
    That's the trap too many are falling into at the moment.
    This bear market had many panic selling and bad fundamental news events.
    Only hindsight tells you these events were not 'bad' enough since we broke to lower levels.
    The last one was right after september 11.. There was panic and we got a couple months reaction to the downtrend. A pretty good example of pavlovian trading actually. Obviously this was not a bottom.

    The 'bottoming' process may well spread to include both sept lows and july lows. But we will know for sure only long AFTER the fact.

    Technically long term I easily see this market going much lower. It would be very easy and logical. It's not a prediction. The market could build up from here and turn bullish.
    It's not the favored scenario because the trend is still down officially.
    As far as trading is concerned, I don't care. I only looked at the chart to answer the question. It's better not be biased and trade what you get, not what you think.
     
  4. Babak

    Babak

    tntneo,

    Totally agree. GBS did an article a while back where he actually looked at previous bear bottoms and showed that a bottom is a movie and not a picture. The long term view (not pretty):
     
  5. Bono

    Bono

    tntneo,

    I agree. And I personally find it pretty hard projecting a bottom at any stage, that's why I'm seeking some guidance here with relation to the DOW theory. Because as far as I'm concerned, we'll bottom when the market starts making higher intermediate-term peaks + higher intermediate-term bottoms, which is like you said an after the fact thing.
     
  6. spectre

    spectre

    Every time the market hits an extreme low (30) RSI on a daily chart, the market rallies forming a hammer candlestick (coincides with lundy's bottom calling btw). Upside resistance so far in this downward trend has been the 20MA. With VIX at a new peak (treasuries looking peakish too), it's likely we'll have some sort of correction rally. Don't know if the market is bottoming. Would need to see a congestion range at these levels and the MAs slope up.
     
  7. Ditch

    Ditch

    Everytime the talking heads are calling bottoms again, you better not count on it.
     
  8. Bono

    Bono

    It seems like people either think the market should make it now or never :) almost no one thinks we could be bottoming in the next 1 to 6 months ... but the fact that not a few think we could be bottoming in the next 1 to 2 years is positive in itself ...

    At this moment I'd go with "I don't know/don't care" option.
     
  9. In a sense, doesn't really matter. We'll only KNOW when it's way to late to catch it.

    As traders, however, we need to play all set-ups that possibly could be THE bottom or part of a complex bottom. Just in case the market surprises.

    This big neckline qualifies as a possible bottom set-up... also as a possible trading low which leads to a signfiicant bear rally. We'll only know which/neither as the market challenges technical parameters which if broken reinforce the bullish case... and if they fail, perhaps reinforce the downside continuation.

    It's been my experience that when the market turns, it clears a number of small hurdles which in aggregate reinforce the idea of a change in direction. We've recently put in a series of hammer reversals which stalled at the small down tops line. Breaking that line could be the start of several consecutive bullish techincal events. Play's the same in any case.
     
  10. tntneo

    tntneo Moderator

    Bono, I appreciate you are looking at this under dow theory.
    But like you reminded yourself DT does not try to include bottom detection. Just because it's impossible.
    Some elements to consider (and I like spectre comments earlier) :
    - you will really know after the fact, trying otherwise will be deadly to your account.
    - the length of the bottom is in proportion to the preceeding bull. meaning long enough. a bull of 10 years -> bear 3 to 7 years minimum (could be much longer. japan 18 years I think at the moment, and US had also very long bear markets last century).
    - the first higher highs MAY be a trap !
    this is often overlooked and is quite deadly. you think it's the start of the new bull, and it reverses because it was just a larger correction of the (then) long bear market. By the way, it did not happen yet (well, yes, right after the bubble imploded).

    As a way to deal with all this if you really really really need to try to bottom pick (let's say in your IRA account, you have to be long).
    Then the safest place is to buy just a little above 3-6 months low. basically trying to find the bottom (arghh! I said it.. and I hate it).
    Your stop loss is pretty close and you can try as many times as you want (and you WILL).
    But at least it makes more sense than trying to buy BELOW the 3-6 months and pray (that's when you are supposed to stop).

    And as pointed out above, the first higher highs might be a trap, so you need to a plan to exit this long position. Because, even though you caught a nice bottom (who does not dream of that?) you don't want to wake up with a turkey.

    a last remark for this post, trying to catch a bottom just for the rebound is not a good risk reward in my opinion. it's much easier to trade the downtrend. So if you try to do it anyway, be sure not to confuse time frames and go for 3-5 years trade (and longer). Then it makes sense. It's still trading, (since I don't believe investing exists for us, unless you do it like Buffet). Eventually you may also target a % profit instead (the bottom picking last sept, I took it long term but was out in early feb- reward was good enough).

    tntneo
     
    #10     Jul 12, 2002