4. How Major Market Bottoms Form: Part I, Panic and Capitulation

Chapters 2 and 3 focused on the life cycle of a major market uptrend and the subsequent formation of a major market top. Major market tops are characterized by distribution, that is, well informed investors liquidating shares of stocks in anticipation of lower prices in the coming months. Distribution is then followed by the markdown phase, which is the bulk of the bear market itself, or the process of stock prices trending lower. The markdown process can vary greatly in length. For example, the decline from the 1929 high lasted three long years, while the bear market of 1998 was a mere three months. As the markdown phase nears its end, signs of the final phase of the bear market—the ...

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