Written by A.J. Brown

Counting Method to Determine a Market Bottom

Counting MethodNearly 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 above average, 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.

Categories: Education / Lessons / Options / Trading

18 Responses to “Counting Method to Determine a Market Bottom”

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  1. gary @ 3:09 pm:

    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.

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  2. Gerard Verkaik @ 11:55 am:

    Never used this counting method.I printed the message and will apply this feature.
    Gerard

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  3. Ken Long @ 12:07 pm:

    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.

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  4. evi @ 7:19 pm:

    I thought market still in downtrend, with March 24 & February 26 hit the resistant line.

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  5. RichE @ 11:10 am:

    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

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  6. RichE @ 11:13 am:

    Oops forgot the credits, the trend formula is from Market Club, INO.COM Trend Analysis.

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  7. The Bull & the Bear: Where’s the Market Heading? @ 8:57 am (Pingback)

    [...] Also, technically on Friday, the NASDAQ logged day one of our counting method to determine a market bottom. [...]

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  8. Shin Aguallo @ 9:44 am:

    Howdy! I’m at work browsing your blog from my new iphone 3gs! Just wanted to say I love reading your blog and look forward to all your posts! Carry on the superb work!

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