Tuesday, March 10, 2009

The Signs of The Bottom: Technicals

Anybody enjoyed today's bear market rally? Huge yawn.

I did some digging into technicals of Great Depression market. Looks like 13 days moving average (MA13) can tell you something. There were several short bull market periods between Oct 21, 1929 and July 5, 1932. All of them had one thing in common: Dow stayed above MA13. Any time Dow dropped below MA13 for more than one day, you could safely sell market short. Big rally which started on July 5, 1932, also quickly crossed MA13 and ran above it until Sep 12, crossing on the way MA50 and MA200. Until August of 1937 Dow and MA13 oscillated around MA200, then there was another bear market. In June 1938 Dow and MA13 crossed up MA200 and the rest is history.

How does it correlate with current market? So far quick drops followed Great Depression patterns: Dow stayed below 13 days MA. Unlike Great Depression time we didn't have any bull market periods though. So analogy is not complete. Of course, any historical recourse should be taken with caution.

Where are we now? Since Feb 9, Dow didn't cross MA13 up once. It failed to cross it today. We are still in the fast drop phase of this bear market. If GD analogy is correct, we need to see Dow crossing MA13 and staying above it for a week, at least. And to make global bottom, Dow has to cross up MA50 and then MA200, staying above MA13. Of course, by the time of crossing MA200 we are going to miss about 20%...

Tomorrow is a crucial day. If Dow crosses up MA13, it might be the end of the fast fall and even sign of the local bottom. Especially if it stays above MA13 for one more day.

Of course, technicals can be deceiving. We need to look at bigger picture. I think that contrarian indicators outlined here and here are more important. But picture looks interesting.

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