The Template

Here is a long term chart of the US Stock Market. All the great Bull and Bear markets from 1900 are included. The Panic of 1906. the 1927 Crash, The 1987 Crash, the 1970s twin bear markets, etc. -They are all there.

Throughout history almost every bear market bottom has been made after the stock market has formed a base. Markets do not turn on a dime.
The fabled spike "V" shaped bottom is a rarity that I have never seen. Rather, market bottoms form after the market traces out some sort of pattern such as a double bottom or a head and shoulders reversal.
Lets look at some examples starting with the Kennedy Mini Crash of 1962. As one can see, the market fell off a cliff when President Kennedy tried to muscle the Steel Industry with price controls.
The market snapped back as fast as it fell, but only after putting in a double bottom. The bottom was put in only after the following steps occur ed:

1- The market dove to an initial spike low

2-The initial low was followed by a run up to a trading range high.

3-The market then faded a retested of the lows.

4- The market then exploded to the upside taking out the the trading range highs set by number 2 above. A classic double bottom.

Now lets move to the ugly twin bear markets of the early to mid 1970s. The 1970 Bear market culminated with Bankruptcy of our largest railroad, Penn Central. This was immediately followed by unprecedented emergency actions by the Fed to pump money into the system.
The bailout (Nationalization) of Penn Central and the loose money policy of the Fed, saved the day. The market put in a double bottom and then a huge multi month head and shoulders reversal before it rallied.

The 1974-75 bear market caused by Watergate, the Viet Nam War, Gasoline crises, inflation, etc. culminated with a huge double bottom. Just like 1972 the same 4 steps were put in before the low was in place.I can go on and on with examples of market bottoms including the 1987 crash. The key point is that every major market bottom goes through a similar process. So lets look at today's ugly market.

Step number one on the road to recovery would be for the Dow Jones Industrial Averages to reach their mid November reaction high around 9500-9800. That would break the sharp downtrend that began in September and would hit the wall at obvious an Resistance level.



Step two would be to pull back and again retest the lows. This retest would hopefully make a much higher low than last weeks low. That would set the stage for a year end or new years rally to retest the 9500-9800 resistance level. This time the averages would hopefully blast through the resistance level to new highs. That would be the first major step in forming a bottom. The next step would be to break each and every downtrend line in place since the start of the bear market. That includes taking out the 200 day moving average.

The major point of my post is that market bottoms take time to form. Anyone who buys the market after a base is formed may miss the first 5% or 10% of the move. However, I would gladly give up that small percentage in return for making a much higher percentage trade that captures the vast majority of a bull market rally.