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Double Bottom? Triple Bottom?

S&P 10 daysDouble Click on Graph for Full Size View

If you look at the full size view of the graph above, you will see that I’ve put a purple box around the two lows made on Monday and Tuesday.  One of the basic concepts of technical analysis is that once a market makes a low it has to retest that low and not violate it (in any material manner) – this situation is called a double bottom and provides a theoretically significant level of support for future market activity.

In my opinion, the above potentially qualifies as a double bottom subject to the index completing the second “rule”  – the first being making the low and then the retest.

But what does that really mean?  Generally, you have a fairly low risk entry point to begin to buy stocks because a floor of sorts has been put in under the price coincident with the price at the double bottom.  However, the part of the “rule” that most people ignore is that the index has to break above resistance for the double bottom to be successful.

To that end, I’ve added some resistance levels on the graph for you to check out that are based on a Fibonacci retracement of the selloff from the high where we broke above the 2100 resistance level to the lows put in the past two days.  You can see that for each of the past two days, the market approached the first resistance level and was turned away.  Today, we moved back up toward the resistance level, but buyers didn’t have enough steam to breach resistance.

That puts a Triple Bottom in play unless we manage to move above the 1957.70 resistance level.  We closed at 1943.09. just 0.75% away from resistance.

So what does all this mumbo jumbo really mean?  It means that tomorrow we would like to see the index move up and close above 1957.70 – it then needs to stay above 1957.70 for three market days or 3%  additional upside (this is my addition to the rule based upon my years in the investment business – blog readers from 2008 and 2009 heard all about it back then).  If so, the triple bottom has been taken out of play and the market then needs to move toward its next resistance level at 1985.52.

It also means that you have achieved a low risk entry point to jump back into the market.  If you are like me, you have been buying during this blood bath based upon the fundamentals (discussed the past two days on this blog).  Buying at these levels is not as low risk as waiting until you have confirmation the the double bottom has been achieved.  However, committing money in stages when there is extreme fear in the market has always worked for me in the past as long as the fundamentals for the market support it.  In this case, in my opinion, it does (I urge you to check out the past two day’s posts if you haven’t – particularly the calculation of fair market value on the S&P 500 Index from yesterday and the discussion on why this is not the start of a secular bear market like 2007/8/9 from the day before).

Mark