dow bottom

An interesting view ;

http://www.smallcapnetwork.com/Five-Hints-That-Friday-Was-a-Market-Bottom/af/archive/20080712-1/

Ed

Five Hints That Friday Was a Market Bottom


We've been searching for a short-term, trade-worthy market bottom since early June. I think we finally found it on Friday.

OK, first of all, there are never any guarantees or absolutes, but I truly think we saw the market make a hard landing - or bottom - at the end of this past week. This is strictly my opinion, though at least I've supported mine with five reasons below.

By the same token, you don't need me to tell you the market can throw you a curve ball. I never get married to an opinion for that very reason.

Now with proper disclaimers in place, see if you agree with any or all of my rationalizations. One more thought....any one of these five reasons may be telling by themselves, but I believe the combination of all five is where their real value is.

Doji

I'm not a huge candlestick analysis fan. I appreciate it, and can understand the value; I've just not found it to be consistently helpful. That said, when one of the candlestick 'biggies' slaps me in the face, I'm not going to ignore it.

Friday's 'bar' (the open, high, low, and close) for the S&P 500 as well as the NASDAQ could arguably be considered a 'doji'. A doji is a bar where the opening and the closing level are about the same, and also both right in the middle of the day's trading range. The taller the range, the better.

The premise is that such days indicate equilibrium has been met ....equilibrium between the buyers and sellers. Since we've been in 'sell' mode for the last month, we can presume an equilibrium now means the interested and willing buyers are now greater in number than the interested and willing sellers.

It's not as crazy as it sounds, particularly when you get a doji day on the same day you're getting the other four hints, like....

CBOE Volatility Index (VIX)

I've mentioned about a half dozen times I'd like to see the VIX shoot up to 30 or 35 to indicate a massive amount of fear - the kind associated with a capitulation. At this point though, I think I'm going to concede. Friday's high of 29.44 was a pretty good peak, and more importantly, we saw the VIX roll back to a close of 27.49. That's peak-esque....and maybe all the market is capable of giving us right now.

New Lows

I've also been talking about this one quite a bit lately. One of the surprisingly powerful tools I've come across to spot bottoms is unusually high readings of the NYSE's 'new low' level. I think the concept's philosophy can be best described as 'darkest before down' - when a whoooole lotta' stocks are hitting new lows, a rebound is likely to be brewing.

My line in the sand had been 764 new lows for NYSE-listed equities. That was the number we saw back in mid-March when the market started moving higher.

Well folks, on Friday we saw 869 new NYSE lows. As you look back over the last twelve months, that's pretty much in line with readings we saw with the four previous major bottoms.

Volume

Some traders say follow the volume. I tend to agree as long as volume is steady and nominal. When volume spikes, however, I'm more inclined to view it as a pivot. Historically, the higher the volume on the capitulation day, the stronger and longer the reversal is.

Check out Friday's volume for the major index ETFs (DIA, QQQ, SPY, and IWM). It certainly wasn't out of control for any of them, but it was at the highest levels we've seen since - you guessed it - March's bottom. For that matter, the last several rebounds seem to have been jump-started with a volume surge.

Fannie, Freddie, and Indy

Say what you want about why Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRM) shouldn't be in the shape they're in; I'll probably agree with you. These two stocks have been pounded lately, and deserved it.

Both also closed in the red yesterday, but did you see what happened after the bearish gap at the open? Folks, both stocks went up, closing much higher then their opening prices! The only way for that to happen is if somebody is buying what everybody else started out selling.

It begs the questions who was buying it, and why were they buying it?

You could argue it was the dumb money thinking they were undervalued, but I don't see that happening in light of everything. I think this was institutional money flowing in, based on the volume. If things are so bad there, why do so many pros want in?

And IndyMac? Geez, what a mess. Hope none of you were/are customers. Even so, the damage has already been done - I don't see how it has anywhere to go but up from here.

Bottom Line

Was it a great bottom? No, meaning it wasn't the market at its worst. The VIX peak wasn't enormous, and new lows weren't at epic proportions.

And, even though the IndyMac debacle hit the fan, I still suspect there are a few more lingering unknowns like that on the horizon. Once that pot gets stirred again, the next bout of selling could kick in.

As such, I'm not looking for a monster rally from here. I am looking for a decent one though...much more than a couple of days worth. I still contend the ultimate bottom is yet to come; one more good blow-out should do it. And yes, the VIX, new low levels, and volume will still be my clues....as they always have been.

In the meantime, I'm tip-toeing into longs.

Be sure to check out the blog; I'm pretty much giving day-by-day commentary on all this stuff.