Wednesday, August 24, 2011

Don’t Call The Bottom

It’s been a while since I’ve written a post just about trading and where I feel the stock markets are heading. Well, actually I almost always write about it indirectly, like my previous post on June 17 on the “Unease” in the market that was a prelude to the market drop. But I digress.

A lot of people around me have seen the market drastically drop in 2 weeks and subsequently have begun to believe that the market is a “buying opportunity”. This has caused me to become concerned enough to write a post about it. Simply because the market has dropped significantly does not mean it won’t drop more. Certainly that statement goes both ways, but I would like to pose a question – what will drive the market back up? QE3? “Better” than expected economic news? Economic unity in the Europe? “Low” valuations as pundits claim? Yes, all these things might trigger a short term rally, but the downside is all there and I can’t think of many positive things that could surprise on the upside. The market follows the path of least resistance, and it’s clear to me that the path of least resistance is downwards. There’s not a whole lot right now that could drive this market upwards other than short-term swings in the market.

The major problem for me in terms of seeing a clear bottom right now is the lack of conviction in the market. Today I read an associated press article titled:

“AP survey: No recession but weakness will endure—Economists doubt another recession within 12 months but see weakness into 2012

Just what kind of prediction is that? Shoot, I'm pretty sure I don’t need a PhD to make that kind of prediction.

Dow 8.23.11
I decided to not go too fancy with this drawing; not even drawing support and resistance, ascending triangles or things like that. The point is that the upward swing has been broken, rather violently as witnessed by the previous few weeks’ market action.

What, then you ask, will signal the bottom? When the “market” has conviction. A sign of the top is when everyone is bullish, the bears have been beaten down and are back in their caves. A sign of the bottom is when everyone is bearish, the bulls are screaming and driven up the trees. In recent memory - March 2009 was when everyone thought the world was going to end. Before this summer everyone thought the recession was over.

Point is, until everyone is bearish, I wouldn’t call this the bottom. Or at least not until an European Union country defaults and gets the boot.

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