Friday, April 10th, 2009
Are there signs of a stock market bottom?
Australian trader and author Colin Nicholson has another excellent discussion of Dow Theory phases of a bear market.
This time he focuses on the final phase of a bear market ‘distress selling’, which follows the first, ‘abandonment of hope’ and second ‘decreases in earnings’.
Nicholson outlines the key characteristics of the final phase:
1. Significant undervaluation of the general market
2. Unemployment peaks
3. Many bankruptcies and failures
4. Bad news is discounted
5. The market is rarely in the news
6. Low public interest and participation
7. Stock price charts show accumulation
I won’t go into the above points in detail and you should be able to apply it to your own market.
Nicholson’s trading plan requires that during Phase Three he start accumulating shares breaking out of consolidation patterns (ideally of one year or more) to new highs. (He also likes stocks trading above their 260-day moving average).
He increases his buying when the Coppock Indicator flashes a buy signal, and then again when the general markets move into an uptrend (starts making higher highs).
I’ve noticed that Nicholson has started buying a few shares, though he does focus on value stocks as well as growth stocks.
One important point is the third phase of Dow Theory seems to meld nicely with the phase between a momentum low and price low in the market cycles described a few months ago by Dr Brett Steenbarger. I’ve actually added the cycles Dr Steenbarger described to my plan.
My personal opinion is that we’re probably entering the third phase of Dow Theory, though there may be some way to go for it to play out fully.The market is probably being discussed too much at the moment. But it is undervalued, there are signs that bad news is being discounted, and unemployment and bankruptcies are surging. There are also some signs that stocks are putting in accumulation patterns.
As I mentioned in the last update, I’m not entirely convinced this is the start of a new bull market. My own system hasn’t shifted to bull yet. But the action of the market means I’m on high alert for the first time in ages.
How to tell a new bull market has started
This entry was posted on Friday, April 10th, 2009 at 2:30 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
April 14th, 2009 at 3:25 am
[...] example, when we enter Phase Three of a bear market, ‘distress selling’, we know the chance of a rally turning into a bull move is [...]