Identifying Market Bottoms in Bear Markets (Good News)  

Posted by Book Eater

A man may know what to do and lose money- if he doesn’t do it quickly enough.

Note that losing money here- refers to "cutting losses in a late manner" and "missing the opportunities to make money by coming in too late."

Observation, experience, memory and mathematics- these are what the successful trader must depend on.

Thus, I'd like to share to everyone a very very interesting special technical analysis report from Merrill Lynch entitled "Testing 1-2-3". To me, its title should be "Identifying Market Bottoms in Bear Markets." Before we begin, let me quote Jesse Livermore and William O' Neill first. Jesse likes to trade the big moves and not catch the "expensive" quarters/eighths of a point that we are all trying to do.--catching bottoms. So there, I want to remind everyone that identifying market bottoms is a very dangerous course. I just wanted to warn. _________________________________________________________________ You don’t know what you’ve got 'til its gone. I wanted to quote that song because by now, you're probably losing a lot unless you're so smart to have avoided the downtrend. To that, I salute you.


Inspiring Ideas and Vigor to the Game:

Jesse's Quotes Upon Losing:

"There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!"

"Before I can solve a problem, I must state it to myself." - Accept that you have a problem.

Being broke is a very efficient educational agency. - Learn from these losses.

William O' Neill Quotes:

1.) Quit while the quitting is good and cheap.

2.) Don’t wait for the bear market to announce its safe arrival before you start selling.

3.) Suckers in Wall Street aren’t all outsiders.

4.) The big money in booms is always made first by the public on paper- and it remains on paper.

5.) Carefully laid plans will miscarry because the unexpected will happen.

6.) The only time a bear can make big money selling a stock is when that stock is too high- and you can gamble your last cent on certainty that insiders will not proclaim that fact to the world.

7.) It’s easier to spot emerging new trends than to accurately assess correct valuation levels. _________________________________________

Okay. Enough of my quotations speech. Let's get on with the real ballgame here.
Summary of the Merrill Lynch Report issued March 10,2008 (US Economic Outlook)
By: Mary Ann Bartels
In recent days it has become apparent that the major indexes have been engaged in the anticipated testing process. 2.) A test/undercut of January’s low. The NASDAQ has made new closing and intra-day lows, while the S&P and DJIA have established new closing lows
3) A distinct reduction in the number of NYSE stocks making a new
52-week low. On January 22, there were 1114 new lows. So far, this test has resulted in “only” 374 new lows.
4) The rally off of the January low was a shortcovering
move, so we have looked for hedge funds to return to at least nearcrowded short positions in futures and at the stock level; that has occurred.
5.) A 90% up day, That has not occured (The definition for 90% up days is points gained divided by sum of points gained and lost along with up volume divided by sum of up and down volume) To better appreciate this study, in 2002, Paul Desmond, president of Lowry's Reports, wrote a white paper, entitled "Identifying Bear Market Bottoms and New Bull Markets", which discussed the role of 90% up days in identifying market bottoms. He received the prestigious Charles H. Dow Award from the Market Technicians Association.

far, therefore, the evidence is leaning toward a successful test.

See the chart below : Notice that 90% up days have all coincided with market bottoms.

A higher low for NYSE new 52 week lows on a retest of the January lows for the major averages would go a long way in supporting the case for a bottom in the US equity market.

The bottoms in 2002 and 2004 were accompanied by higher lows in NYSE new lows (see arrows below). In fact, in both 2002 and 2004, lower lows for the S&P 500 were accompanied by higher lows for daily NYSE new 52 week lows, setting up what is called a positive divergence.

Before we get too ahead of a market bottom ourselves, here are some more facts:

1.) Bond spreads at levels today are bullish for equities, but further widening is likely before an equity market bottom is in place.

Both the 2-10 year US Treasury spread and the US Corporate BAA to 10 year US Treasury spread have reached bullish readings for the US equity market. However, both spreads are not yet near the extreme wide levels reached at prior major market bottoms and appear set for further widening before an equity market bottom is in place.

2. Shorts returned as the market declined from early Feb top De-trended Adjusted Short Interest Ratio (ASIR) has risen to above average levels, becoming more constructive for the US equity markets. But levels are not at an extreme. We expect levels to still rise.

3.) Money Mountain - Record retail money market fund levels - Investors are at sidelines. High retail money market funds levels represent a future source of demand. With them out in the sidelines, this is a contrarian bullish signal that is supportive of the equity markets. Who's left to sell when most are in cash? Gets?

4.) Insider Selling is Lesser -The Vickers insider sell / buy ratio (8 week average) remains below 2.0 as insiders are buying more and selling less, which is bullish for the US equity market.

5.) VIX (Volatility Index) could test mid 40s before an equity market bottom. Volatility as measured by CBOE VIX index remains in an uptrend from early 2007 and has begun to rise again. August 2007 and January 2008 registered highs of 37, but a move into the 40s may be needed to generate FEAR levels necessary to confirm a bottom for the US Equity Market.


In sum, I am happy and pleased to tell everyone that....a bottom can happen anytime this week, next week, until April. After which, a very nice rally will happen:)

Teehee. haha.. I'm so happy. Byee

- Nix

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