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Process of Bottoming Continues

I think its always easier to understand something if you see a visual. In the graph above, you can see the classic bottom forming in this market.

1. There was the high volume selloff that typically marks a capitulation bottom two two Thursdays ago

2. The swings in the market are still big, but they are getting smaller

3. The volume is decreasing while the volatility is decreasing

This bottoming pattern of a climax selloff followed by rallies and profit taking are classic bottoming market action. Typically, we'd see the technicals underlying the market begin to improve and get stronger, followed by a few weeks of positive price movements before we pull back again. This is exactly what happened in 2002 (you can refer the to chart that I posted a few days ago to see 2002).

As far as the improving technical aspects of the market, you can see in the bottom part of the graph that:

1. Volume is stairstepping down, with selloff days having less volume than rally days – this is good

2. The MACD Indicator (Moving Average Convergence/Divergence) is about just about to cross into positive territory (or in other words, the short term price movement is about to move higher than the long term price movement – a positive indicator of future price trends).

3. The On Balance Volume Indicator is a combination of price and volume and is an indicator of money flowing into or out of the market. In this case, money has stopped flowing out of the market.

Today, we are having another of the selloffs typical of the bottoming process. We continue to use rally days to sell off positions that will not recover as fast during a recessionary economy, and on selloff days we are buying positions that should perform better during a recession and lead the market up when it finally recovers.

Hang in there – a bottom is a process and not a point in time – its tough but we will get through it and portfolios will recover from the crash.

Mark