Trading Basics: Evolution of a Trader

FINDING THE MARKET BOTTOM

How many times have you gone bottom fishing for stocks and after buying, found out that it was not the bottom after all? I suffered through that right along with everyone else during the 2007 to 2009 bear market. However, I cut my position size to as much as one-eighth of what is was at the bull market peak and then tested the waters when I felt I could make some money. Eventually, the market turned and I started piling in, catching the turn within days for some of my utility stocks.

How did I catch the market bottom? Tips 15 through 20 discuss that.

15. Ugly Double Bottom: A Higher Bottom

A higher bottom is what I lovingly call an ugly double bottom. That is when price forms a second bottom that is at least 5 percent higher than the first one. It becomes an ugly double bottom when price closes above the peak between those two bottoms.

For example, the March trend down in Figure 5.10 shows major turning points in which the second bottom is lower than the first. Only at point A do we see the first hint of a trend change. Point A is not at least 5 percent higher than the prior bottom, so it does not qualify as an ugly double bottom.

Consider the downtrend in Figure 5.7. At C and D, price forms two bottoms, but D is only 3 percent higher than C, so it does not qualify as an ugly double bottom. Ignore it. It is not an investment quality pattern.

Now look at bottoms A and B. Those two valleys are over 17 percent apart. When price closes above the peak between ...