Counting Method to Determine a Market Bottom
Nearly everyone (including the IBD) predicted earlier in the week that the market was confirming a bottom. But was the prediction correct?
Personally, I use the counting method to determine a market bottom. And it looks to me like we did NOT reach a market bottom.
Bulls will always attempt to reverse a down-trending (bearish) broad market. These attempts will almost always fail. You’ll hear these failed attempts called everything from technical bounces to false positives to a whole bunch of other names.
Here’s a price pattern to determine if indeed we’ve just experienced a market bottom, meaning the market has just gone through an honest to goodness trend reversal and a bear trend has indeed turned into a bull trend…
1. Look for an up day when the existing trend has been down.
2. The lowest point in intraday trading of the first rally day becomes a support line.
3. The next two days of trading must both stay above the support line of the first day.
4. On the fourth, fifth, sixth or seventh day (fourth is better than seventh), look for the price close of the day to be above the price close of the previous day, volume of the day to be greater than volume of the previous day (the heavier the better), and the increase in price of the day represents 1% or more of the index being studied. This day is called the "follow-through" day.
5. We have to see this on "The Big Three" (Dow, NASDAQ, S&P500).
If the price movements conform with all of these "rules," then it is highly likely the down trend has reversed to an up trend. In fact, this method is accurate anywhere from 80% to 97% of the time.
Back to what happened this week.
The IBD called it a reversal when the DOW, on Day 8 saw >1% of price movement on heavy volume. The problem was… it was just the DOW and it was day 8.
They called it again when the Big Three on Day 3 saw >1% of price movement on heavy volume. The problem was.. it was Day 3 and the heavy volume came from Quadruple Witching.
Yesterday was Day 7 of the current round. Unless we saw >1% of price movement on heavy volume, we would have NOT satisfied the counting method to determine a market bottom and the current rally attempt would be a failure.
Guess what? Yesterday was a big down day. The so-called reversal was false.
Best regards always,
A.J. Brown
P.S. Today’s issue of the IBD is now back-peddling on their earlier prediction that we’d reached a market bottom. Not only was yesterday a down day, it was a down day on heavy volume.
Comments on Counting Method to Determine a Market Bottom »
forget follow through days thats bull we going down and down hard. we will see 11,027 my end of may get short and stay short.lol
Hi A.J.
I’ll program it.
Question: Will this work on individual stocks?
Question: How do you define an up day, is it a close above open or close above yesterdays close?
Question: how do you determine accurate anywhere from 80% to 97% of the time. Does the price have to increase by 10-20% within 2-3 months? Do you allow any retracements?
Thanks
Hey Britishsteel- I know you’re just kidding. But, in all seriousness, you may be right. I just don’t like to speculate with my trading. What you’ve posted is your guess. And, your guess is as good as mine. The counting method is easy to evaluate, and is rarely wrong. So, I’ll continue to evaluate it, and should I see it satisfied, I will reverse my follow through.
Hey RichE- The counting method to determine a market bottom does NOT work as well on individual stocks.
An up day, is when a stock closes above its open (meaning during the trading session, the stock was driven higher.)
80% to 97% of the time, a new trend develops in the up direction… no immediate retracements.
Thanks for your comments everyone. In my opinion, it is your comments, more than my posts, that are what makes a blog worthwhile.
Hi A.J.
I’m coding.
Step 1. A up day is when todays close is greater than todays open. That’s easy. How would you define, “existing trend has been down”. Would this be todays 50MA is 10% less than the 50MA 50 days ago? Or would you say the 10MA < 20MA < 50MA < 200MA?
Thanks.
How did you “invent” this system, or did you learn it yourself through experience? If not, where? How do you calculate the 80 to 90% accuracy? What is your exact formula for your success? What other factors counteract and contradict your method? (this time you used quad. Witching) When you publicly make statements of fact, footnotes would be helpful to prove points, and facts, unless you are stating that this is your personal experience and opinion. I have not studied this system long enough to prove it true, so when I read new methods, it is nice to have details and proofs. I will definately start using it to find out for myself though.
BOTTOM- YOUR ANALYSIS LOOKS GREAT,LOGICAL.
I know you wont back track either.
real learning indeed.
happy that i read this stuff,and that i learned it.
IBD seems confused and confusing.
regards
ramesh
does any body code it into Amibroker?
please enlighten me.
thanks
ramesh
Hi AJ,
I’ve been an IBD subscriber for years. They are looking for a price or index change of 1% or more on increasing volume to begin a reversal possibility. Then, a confirmation day within a few days later with high volume in the same direction. Any trend reversal requires both events but does not guarantee it (necessary but not sufficient to guarantee a trend reversal). Any trend reversal indicator has a probability less than 1, including yours, else we’d all be counting our booty while snoozing on Waikiki with Hula Girls feeding us grapes.
Hi Bob- Thank you for your suggestions on how to make my blogging better. You comments are duly noted.
Also, you are taking the right stance. Test and prove what I have written for yourself.
For all readers of my blog… please please don’t believe a word I say.
I write about what I have learned and my experiences. And, they are just that, my learnings and my experiences. Just because they work for me and help me profit at trading… and, just because they have worked for over a 1,000 others I have taught who have taken my learnings and experiences and profited from them, does not mean what I say is definite, positive, unequivocal fact. You are welcome to take what I say and write about and test it, use it, believe it, or file it in your file “13″ (a.k.a. the trash can).
Hi TomF,
I defer to your expertise as being a long term subscriber to the IBD, as knowing better their reversal identification method. Your description helps me understand better their Market Watch stance. Thank you.
In these schizophrenic times, I’m grateful that my counting method to determine a market bottom, is more conservative. The drawback of course, I’ll be up to 5 days late in calling a new bull rally when it really comes. I can live with that.
Hi A.J.
I keenly follow your blogs becuase it’s always good to get learning pointers whenever I can.
As you say, it’s best to see what works for each of us, but I will draw from your experience and becuase of that I’d like to try and prove your findings by backtesting on some historical data.
Quick question. On your first point you mention “Look for an up day when the existing trend has been down.” … over what period do you determine the down trend… days, weeks, months?
Thanks,
Gary.
Never used this counting method.I printed the message and will apply this feature.
Gerard
A market bottom, not The market bottom. Big differrence.
How about just waiting for a higher low followed by a higher high. This would be the first major indication that the trend has reversed, then we would wait to see the next low to confirm a rising trend line and not just a volitility shakeout.
Trends can and do reverse in mid space, but I prefer to see a solid bounce, or a longer term bottom forming pattern before making that kind of call.
Two things. If we are in a true bear market, which I doubt, then we havent seen the despair necessary to reverse the trend. The Fed keeps intervening before real fear can take a grip. This is the controled decline that Bernancky promised.
There is a lot of money sitting on the sidelines waiting for an opportunity to capitalize on these moves.
We wont know if this was a true bear market until its over.
Luckily we dont need to. All we really need to do is assess the current direction or move, and get in and out with a profit. Following the longer term trend and seeking market bottoms is really for investors and longer term traders.
When I look for trading oportunities I do look for trend, because it makes the trading easier. But what I really look for is range, because thats what makes the trading easily profitable. A good trend adds reliability and predictability, but the average range tells us our average profit potential.
True range is simply, Max H - Min L. This can be written as a formula, but that requires multiple formulas for different time frames, and if you wish an average you will need multiple samplings over a larger time period. I have these formulas written and check them all the time to assess trading potential. This works well if you have chosen time frames and wish to assess potential.
Anouther way is to use a True Range Indicator, same formula plotted as an indicator, or use the one that comes with many charting packages. I like this because you can change the time frame by changing the bar count and visually see the range and determine what the average is and where you are in respect to that average.
The ranges that I find most useful are, 5 day, 10 day, 20 day, and/or 15 min, 1 hour, 4 hour, depending on what your looking for, also daily, weekly, monthly can be useful.
Sorry for running on in your space. Just a little something that I use often that I thought might be of interest.
I thought market still in downtrend, with March 24 & February 26 hit the resistant line.
How’s this for trend?
Based on a pre-defined weighted trend formula for chart analysis, KEX scored +100 on a scale from -100 (strong downtrend) to +100 (strong uptrend):
+10 Last Hour Close Above 5 Hour Moving Average
+15 New 3 Day High on Monday
+20 Last Price Above 20 Day Moving Average
+25 New 3 Week High, Week Ending March 29th
+30 New 3 Month High in March
+100 Total Score
Oops forgot the credits, the trend formula is from Market Club, INO.COM Trend Analysis.