January 22nd, 2009

Measuring the Reversal and Bottoming Process

Everyone seems to be now writing about what past bear market bottoms have looked like. Yesterday, The Kirk Report included a link to another wonderful interactive chart from dShort.com entitled Bear Market Recoveries Since 1950, to which I include a link here at the risk of your exiting Stock Chartist before reading the very interesting information that follows.

I first wrote about the nature of past Bear Market Crash bottoms on October 13 in “What Past Crash Bottoms Look Like“. I followed up by writing about a bottom building process in the works on November 6 in “Fairy Tale with a Happy Ending” when I inserted a chart (see below) depicting what the shape of the market’s might be over the succeeding several months:

Here’s what the picture through yesterday’s close actually looks like:

The two charts look similar so, as far as I’m concerned, the bottom process is still in place. It still appears to me as if the market is in a valiant effort to break the beak of the bear market downward trend. It hasn’t reversed the trend but, and this is what I’m hoping for, the market is moving horizontally.

One of the most popular measure of trend is the moving average. I’ve written before about the”Golden Cross” stocks (stocks whose price and 90-day MA have crossed above their 180-day MAs) and I’ve written about the MTI (Market Timing Indicator) which requires that, at a minimum, the Index is above the 180-day MA as clear evidence of minimal risk to investing in the market.

But how are individual stocks doing; is the health of individual stocks improving? The 90-, 180- and 300-day moving averages are consistent more stringent benchmarks for indicating a high probability that a stock has turned the corner and is trending higher; the most stringent is the “Golden Cross” benchmark. And how many stocks are exceeding these various benchmarks today as compared with October 27, when the S&P 500 was at almost the same level as yesterday’s close:

Of the 6742 stocks (excluding ETFs) in the Telechart database, 22.1% are above their 90-day MA as compared with only 154 on October 27, 2008; the important in each of the other measures was similar though not as large since each measure is harder to meet.

When you look at the charts for these stocks, many clearly have formed reversal patterns which others, though having turned the corner have yet to complete their pattern and deliver a break out move. But I believe, the process has begun and will gain momentum as we move into the Spring and Summer with announcements of the Administrations new programs.

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