A “stock market bottom” is a general term used to describe the end of a Bear Market. Bear Markets are generally not welcomed with open arms because investors tend to lose a great deal of money however; there are two sides to the story.
A lot of money is lost during Bear Markets, but a lot of money is also made during and at the end of a Bear Market. If you happen to be one of the lucky investors who can gauge when we’ve hit a market bottom, then you will be able to go discount shopping and cash in on the early moves.
So how do you know when we’ve reached a market bottom and are moving onto higher territory? How do you know when your account, which has been bleeding money, will finally start gaining ground again?
The following 5 methods will help you spot a market bottom:
Look for the number of stocks hitting 52-week lows to decrease. You can obtain these figures from the Investors Business Daily. You eventually want to see the number of “new highs” start to outpace the number of “new lows.”
Pay attention to the short interest of stocks. As investors become more bullish on stocks, you’ll see the short interest in major stocks decline.
Method 3 (applied to the major indices)
Look for a double bottom in price of one of the major indices. This is when prices trend down, trend back up, trend back down, and then back up again, forming a “W”.
Method 4 (applied to the major indices)
Look for a crossing of the 30 and 200-day exponential moving averages.
Method 5 (applied to the major indices)
My last and favorite method was outlined in William J. O’neil’s book, 24 Essential Lessons for Investment Success.
In a confirmed Bear Market, look for an up day when the existing trend has been down. This is Day 1.
The lowest point in intraday trading of the first day becomes a support line.
The next two days of trading must both stay above the support line of the first day.
On the fourth, fifth, sixth or seventh day, (fourth is better than seventh) look for the price close of the day to be above the price close of the previous day, volume of the day to be greater than volume of the previous day (the heavier the better), and the increase in price of the day represents 1% or more of the index being studied. This day is called the “follow-through” day. The follow-through day signifies that we have reached a market bottom.
Whatever you do, please don’t watch the news to find out when we’ve reached the end of a Bear Market and have found a bottom. You’ll just become confused by all the contradictions between the news correspondents and they always show up to the party late.