Bottom process part 3 by Grant C

Bottoming Process—Part 3, Week 13 by Grant Cooke


Part 3 in our comparison of the 2002 and 2008-09 bottoming processes shows that today’s market is considerably weaker and taking much longer to find support. By week 13, the 2002 bottom was well on its way to resolution. We had successfully tested the lows by week 11 and rallied nicely for two weeks until price hit resistance at the declining 20-week EMA. The successful test and subsequent rally had reversed the direction of the 5-week EMA, turning it up for the first time in several months. Even the declining 20-week EMA was starting to respond to the rally, and its decline was losing force and turning sideways. By week 5, the MACD-H had crossed the centerline, and then crossed down on less momentum forming a higher low and a classic bullish divergence. Bids were starting to hold. Bulls, though not snorting and pawing the ground, were at least coming out of hiding. While it would take several more months of sideways action to build a base for the next bull market, the trend was no longer down.

By comparison, the 2008 Bear is much more vicious and prolonged. At week 13, we’re resuming the downtrend after several weeks of sideways churning. The 5-week EMA has pitched down and price is clearly testing November’s lows around SPY 75 (SPX 750). MACD-H recovered a bit while the market churned, and now, but now it’s dropping again. In 2-4 weeks it will be below the centerline, unless something dramatic happens. Price may pause here for a week or so, but it looks like support will crumble and we’ll make a lower low along with the MACD-H.

Most disturbing is the converging Bollinger Bands, indicating we’re entering a squeeze on the weekly charts. These weekly squeezes are rare; the last one was in April 2008 and set the stage for the market’s freefall. Usually, they occur at significant junctures—tops and bottoms—but once in awhile they occur mid-move. If price doesn’t hold SPX 740-750, the subsequent action will be nasty. Conversely, if price somehow holds above SPX 740-750 and the retest of the low is successful, and MACD-H traces out a slight decline and subsequent bullish divergence, then we may get a move up powered by the squeeze.

Clearly, the 2008-2009 Bear market is not to be trifled with, nor ignored if you have money at risk. It is definitely changing the way the world perceives investing. Day traders are kings, and for us swing traders, the rules are simple: bet small, sell strength, buy weakness, and cash the chips quick.