How You Can Spot Stock Market Bottoms

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How You Can Spot Stock Market Bottoms

Once you've recognized a bear market and scaled back your stock holdings, the big question is how long you should remain on the sidelines. If you plunge back in the market too soon, the apparent rally may fade and you'll lose money. But if you hesitate at the brink of a roaring recovery, opportunities will pass you by.

Again, the daily general market averages provide the best clues. Watch for the first time an attempted short-term rally follows through on anywhere from its third to tenth day of recovery. The first and second days of an attempted improvement can't tell you if die market has really turned, so I ignore them and concentrate on die follow-through days of the rally. The type of action to be looked for after the first few days of revival is an increase hi total market volume from die day before, with substantial net
price progress for die day up 1% or more on the Dow Jones or S&P Index.

There will be some scarce cases where whipsaws may occur; however, in almost every situation where the rally has a valid follow-through and then abruptly fails, the market will very quickly come crashing down on furious volume, normally the next day.
Just because the market corrects the day after a follow-through, however, does not mean the upward follow-through was false. When the general market bottoms, it frequently backs and fills (testing) near the lows made during the previous few weeks. It is usually more constructive if these pullbacks or tests hold up at least a little above the absolute intraday lows made recently in the market averages.