Tuesday, April 7, 2009

Signs of Major Market Bottom

My brother has been reading the market reports and puzzled by the different views. The other day, he asked for more clues of a major market bottom. My simple answer is:

Phase 1 - After the market hit the major bottom, there will be several days of short covering (i.e. traders buy back short positions) immediately following that. It often comes with several gap-up days. Their daily volumes are usually higher than normal.

Phase 2 - When the buying to cover the short positions is done with and dries out, the market will fall back and sometimes retests the bottom but not lower than it. The sellers in this phase are those who are caught in down trend holding long positions and now fear for further downward swing later. This duration can vary depending on the market sentiment. The Volume may be lower than earlier phase. When the selling stops, the market will be ready for the up-trust in the following phase.

Phase 3 - The up-swing starts when the market sentiment is sufficiently positive for buyers to re-enter the market. This phase can only be confirmed when the 'high' in phase 1 is surpassed by a new 'high' in this phase. Volume is usually higher around the new high and thereafter.

Above signs may help one to guess if the market has reached bottom.

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