Techniques

OVER THE LAST 208 YEARS, WHEN THE [RSI] HAS FALLEN TO THE 30 OVERSOLD LEVEL AND REVERSED, THE STOCK MARKET HAS ALMOST ALWAYS BOTTOMED OUT.
Gauging a stock market bottom is never an easy affair but the current bear market is particularly tricky because many indicators have moved well beyond their normal boundaries. This tells us that this one is a little different and that we should be a bit more careful. One indicator that has consistently and reliably called major lows in the US equity market is a simple 18-month RSI. The chart shows that over the last 208-years, when it has fallen to the 30 oversold level and reversed, the stock market has almost always bottomed out. Such periods have been flagged with green vertical lines. I have also labeled three questionable signals with the dashed red arrows. Remember the chart covers over two centuries of history so these three trading ranges or small rallies may not look that impressive, but they all lasted for just under two years. Against those small discrepancies we have an indicator that called the three greatest bear market lows in history in 1842, 1857 and 1932. Right now the RSI is still declining but I estimate that a monthly close of the S&P above 920 would result in a reversal. Whether that would be enough to change the overall direction is another matter. However, with sentiment extremely negative and economic news being universally disastrous, conditions are ideal for a major stock market low.

Martin Pring
Pring Research

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Techniques

IT IS IMPORTANT TO IDENTIFY THE MAIN PIVOT POINTS, AND MOST IMPORTANTLY, THE 2ND LOWER TOP AFTER THE INITIAL SELL-OFF.
It is always important to take the price extreme where the top was set as your main reference point. Thereafter it is essential to identify the following main pivot points, and most importantly, the 2nd lower top after the first initial selloff; using Elliott Wave this top can either be classified as a countertrend B-wave rally top or as a 2nd wave top within a bigger 5-wave sequence down, which in itself is going to form an Awave of bigger scale or a wave 1 of bigger scale. After this 2nd lower top the market usually sells off dynamically, and quite often forms so-called subcounts within either a bigger 3rd wave or the so-called C-leg down of a bigger A-B-C consolidation pattern. Once this impulsive price movement has reached an exhaustion point we have another reference point which we now compare to the 2nd lower top identified earlier. We calculate a 38.2 % retracement from this 2nd lower top to the latest price low as we know that 4th wave rebounds, assuming that a 5th leg down might be missing, are usually exactly capped at these 38.2 % retracements. That said a break above the latter would deliver the first strong evidence that a sustainable low is in place and that we are at least due for a much bigger countertrend B-wave rally, or the resumption of the long-term up-trend.

Thomas Anthonj
Technical strategist, RBS Treasury

THE BEST WAY TO IDENTIFY A MARKET BOTTOM IS TO UNDERSTAND THE ELLIOTT WAVE PATTERN AND USE SENTIMENT AND MOMENTUM INDICATORS TO CONFIRM.

Bob Prechter
Elliott Wave International
The best way to identify a market bottom is to understand the Elliott wave pattern and to use sentiment and momentum indictors to confirm or refute any case for a bottom made on the basis of waves. Any system that attempts to identify market bottoms by a set of quantitatively defined parameters is only occasionally useful and often counterproductive. The reason is that the stock market proceeds by way of a hierarchical fractal, so the attributes of each bottom are commensu-

rate with the degree of bottom the market is registering and dependent upon its context within the larger wave structure. For instance, an intermediate low near the end of a primary bull market will have a different depth of pessimism and a different momentum complex (including divergence) from the same degree low near the end of a primary bear market. Therefore an analyst must study the history of his indicators in light of past bottoms and their position in the wave structure. There are many helpful timing tools, but the Elliott wave context is most important. With it you can still be uncertain or wrong, but without it you are lost.

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Techniques

A VERY COMMON AND EASILY DIAGNOSABLE BOTTOM FORMATION IS THE W BOTTOM. THESE OCCUR WHEN THE INITIAL LOW IS MADE AND THAT LEVEL IS RETESTED.

John Bollinger
Bollinger Capital Management
A very common and easily diagnosable bottom formation is the "W" bottom. These occur when an initial low is made and that level is retested in a subsequent period after an intervening rally. The retest can occur above, at, or below the level of the initial low. Bollinger Bands can be very helpful in diagnosing such bottom formations as

they define high and low on a relative basis. A typical pattern is an initial low made outside the lower Bollinger Band followed by a retest that occurs inside the lower band. Even though the retest may involve a new absolute low, a new low relative to the Bollinger Bands has not been made and that is the key. This relationship can be assessed by comparing the action of %b, (an indicator which tells us where we are in relation to the bands), to price action. All that is left is for market action to confirm the technical setup. %b = (last lower BB) / (upper BB lower BB).

THE CRITICAL AVERAGE IS THE 200-DAY AND NEAR THE LOW THE INDEX WILL HAVE DEVIATED FROM THAT BY AN EXTREME AMOUNT.
a bear phase is the index making a pattern of falling highs and lows below falling moving averages. The critical average is the 200-day and near the low the index will have deviated from that by an extreme amount. We would measure percentage deviation over the period, or use regression analysis, and expect to be at least two standard deviations below trend. In the current markets in mid October 2008 that deviation had been as large as at any time since October 1987 or 1974. Secondly, history shows that bear moves down of greater than 50% are very rare. The level of 50% of the all-time high should always be used as a point from which to get a good rally. Even on those occasions when it falls a lot further, like 1929 or Japan after 1989, the 50% level is still good for a super rally. We need to see selling capitulation. This amounts to several days trading on high volume with the market
Jan-Mar 2009

Robin Griffiths
Fund manager, Cazenove Capital Management
To be in a position to make a market bottom it is first essential that the market is in a bear phase. The definition of
30 THE TECHNICAL ANALYST

falling. Lowry Report measure 90 % downside days; take total up and down volume and 90% of all off it has to be negative. Since October 10th 2008 we have had ten such days depending on which index you look at. Eventually the short positions close and some long only money comes into play and a 90% upside day will be produced. This is the heads up for a final low. The original low for a small rally then has to be retested. As soon as you get a 90% up day after the lows, a retest of the prime up trend should start. Most people do not believe it. Lows are made in a mood of despair, rallies in a mood of scepticism, and the next top in euphoria. This time the retest low was in November. We are having a Christmas rally and this may follow through into a honeymoon for a new US president. We do not believe it is the final low of the bear but it is the low for 2008.

Techniques

WHEN MORE THAN HALF THE INDICATORS ARE MORE EXTREME THAN THEIR MEDIAN LEVELS REACHED AT PAST BOTTOMS, A BOTTOM BECOME A HIGH PROBABILITY
Using seven bear market bottoms since 1982, we tested indicators for their bottom-spotting prowess, identifying a dozen that have been reliable in reaching extremes around past market bottoms. They fall into four categories: 1) Volume. Extremely high declining/declining volume, 50-day/200day total volume, and the 10-day open TRIN. 2) Breadth. Extremely low percentage of stocks above their 200-day moving averages, 90-day advance/decline ratio, and net new highs as a percentage of issues traded. 3) Volatility. Extremely high VIX Index, 100-day daily change on the S&P 500, and intraday percent change on the Dow Industrials (three-day average). 4) Sentiment. Extremely low reading on an NDR composite of sentiment survey results and the ratio of bulls to bulls-plus-bears reported by the American Association of Individual Investors, and an extremely high spread between the Moody Baa bond yield and 10-year Treasury note yield. When more than half of the indicators are more extreme than their median levels reached at past market bottoms, a bottom becomes a relatively high probability. The greater the number that do so, the stronger the case that the market has hit bottom. The bottom is then confirmed when subsequent bullish readings are generated by the breadth indicators.

Tim Hayes
Analyst, Ned Davis Research

SINCE 3 NOVEMBER 2008, THIS INDICATOR [PTI] HAS AGAIN BEEN SIGNALING THE END OF THIS BEAR MARKET, OR AT LEAST A SIGNIFICANT BEAR MARKET RALLY.

Chris Watling
Longview Economics
The Longview Primary Trend Indicator (PTI) picks up changes in the primary trend in the stock market and is based on the technical assertion that bull markets end in euphoric rallies/tops, while bear markets end with dramatic and aggressive sell-offs. Using our daily risk appetite indicators, we then measure the relative performance of our short term BUY signals versus our short term SELL signals. In times of euphoric rallies the SELLs perform poorly, while the BUYs perform very

well hence the PTI becomes very negative (as it measures the performance of the SELLs less that of the BUYs using the last 6 signals). In times of aggressive sell-offs the SELLs, naturally, perform very well while the BUYs perform poorly. Hence the PTI indicator becomes strongly positive (i.e. >+3%). In the past 9 years the PTI indicator has generated 4 previous BUY signals, and 4 SELL signals. Since the 3rd November 2008, this indicator has again been signaling the end of this bear market, or at least a significant bear market rally.

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Techniques

AN IMPORTANT POINT IN IDENTIFYING A MAJOR STOCK MARKET BOTTOM IS IN RECOGNIZING THE DIFFERENCE BETWEEN A LOW AND A BOTTOM.
bottom building process. A Bottom is a function of price and time, not a one day event. In other words, a LowRally-Retest sequence (a W pattern) needs to occur, over a period of weeks and or months. Within the context of an ongoing down trend, once a dramatic, multiday/week high volume price decline occurs, I measure the selling intensity that was registered at that point in time. Some of the internal stock market indicators I use to measure the selling intensity are the number of new NYSE 52-week lows, total NYSE volume, the ratio of NYSE Advancing volume to Declining volume, the number of net Declining issues and a proprietary, Oversold - Overbought indicator. Following the Low, I then look for a counter trend rally that can last anywhere from a few weeks to a few months. Im not overly concerned with how high the rally goes or what percentage retracement occurs. I am simply looking for a counter trend rally. At this point I start looking for a pull back, a retest of the initial price low. A Retest can occur slightly above, in line with or, slightly below the initial Low. As the Retest develops I measure the accompanying selling intensity and compare it to what occurred on the initial Low. If the selling pressure on the Retest is below that which was recorded during the initial Low, I get more emboldened about the stock market. If the price peak that was recorded during the counter trend rally is over come on a closing basis, the bottoming pattern is complete. A few examples of a Low-Rally-Retest sequence include 2002-2003, 1998, 1987, 1982, 1974 and 1970. Concurrent with this sequence, investor sentiment needs to have moved down to the point of capitulation, despondency, depression. This is measured, by amongst a number of things, the Bull-Bear investment advisory figures, Index Put Call ratio, headline news stories, feedback from the financial advisors I speak with, and client seminars I conduct.

Art Huprich
Technical analyst, Raymond James
Within the context that a V type bottom (straight down and straight up) is a rare occurrence in the stock market, an important point in identifying a major stock market bottom is in recognizing the difference between a Low and a Bottom. A Low is a function of price only, a starting point for a rally and the beginning of a potential

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