Grant C, one of our winningest Spikers, has sent in this contribution:

More about bottoms

I thought I would revisit my late November 2008 post about how the 2002 bottom formed. As I said in that post, reviewing the 2002 bottoming process, which took almost a year, is extremely helpful in viewing the current market action. Both charts are weekly Candles with 5, 20 and 40 week EMAs (25, 100, 200 day EMAs) and MACD-H indicators.

In 2002, the market’s first stab down was in July, taking price deep below the Bollinger Band and forming a long Hammer candle. We rallied for four weeks, coming close to the declining red 20 WEMA (100 DEMA). Price then crumbled and for seven weeks we sank back to the lows, forming a major weekly MACD-H bullish divergence. Note also that on the retest, price stopped inside the Bollinger Band, confirming that the retest was successful, and the bottom was in. From the retest, we surged back through the declining 100 DEMA and into the declining 200 DEMA, which stopped the rally cold.

The 2008 bottoming process shows the mid-October stab to the low, outside the Bollinger Bands. It then reverses with a Hammer-like candle with a tail. Then for 5 weeks we’ve recovered with more sideways action than upward movement. Still we’ve managed to come fairly close to the declining red 100 DEMA. Guess what’s next? Based on the 2002 model, we probably break support here and drift downwards for 4-6 weeks until we retest the October lows.

As our comparison shows bottoms are processes consisting of time and price. Bear markets are painful, they wear on investors, take their money, and finally leave them disgusted and looking for more pleasant amusements. To be a successful trader in this environment takes patience and a game plan. A sense of history also helps.

Grant C