If it Looks Like a Bottom, and Feels Like a Bottom…
Yesterday’s action has everybody screaming ‘bottom’. As many of you know, I’m always looking for the day that feels like death all through the morning and has a furious rally late in the day as a mark of a believable bottom. Well that exactly what we got yesterday. In addition, the lows from Monday were also retested. That action created tweezers bottoms in many stocks and several of the indices. From Steve Nison’s book:
Tweezers tops and bottom — when the same highs or lows are tested the next session or within a few sessions. They are minor reversal signals that take on an extra importance if the two candlesticks that comprise the tweezers pattern also form another candlestick indicator. For example, if both session’s of a harami cross have the same high it could be an important top reversal since there would be a tweezers top and a bearish harami cross made by the same two candlestick lines.
In many cases, especially in individual stocks, the tweezers bottom is made by hammers on both Monday and Wednesday. I think those in particular are very important because it’s very likely that the sellers in those stocks have exhausted themselves. They’ve tried to break those stocks twice now and failed. The smart bears will be looking to cover their positions now.
You’ll also see many people calling yesterday’s action a key reversal day. The guys at TC2000 had this to say about yesterday’s action:
Key Reversal DayThe Dow and the SP-500 had all the requirements for this to be classified as a “key reversal day,” sometimes termed “a one-day reversal.” The stock or the average must go to a new low for the move it is in, turn and close on its high. The net change must be up and volume must be up (preferably dramatically) for the day. Ironically, although both the Dow and SP-500 fulfilled all of these requirements, they remain in minor uptrends. If tomorrow each closes above its respective Friday close, the minor trends will be reclassified as up. I suspect this will happen. But it is still a long way to reverse the Intermediate Downtrends (which date back to the February high).
The Nasdaq didn’t qualify for a “key reversal day,” because it didn’t close up for the day. But that is almost a technicality, since it did drop to a low and close smartly on its high with increasing volume.
I think there is more to come on the upside. -DW
So there you have it, everybody knows that yesterday was the bottom. So go ahead and buy with impunity. 
But seriously, as I’ve been saying for a couple of days now, I think we’re due for a rally. Yesterday’s action only reinforces that feeling. But I expect the run to be choppy. And since most stocks are still in steep downtrends, I’m still going to play light on the long side and start looking for shorts after a few days if the rally looks weak.
This post has 8 comments
May 13th, 2004
What makes me think this selloff was a headfake for the bears:
1) Earnings reports were mostly positive in the most recent go-round.
2) Sox was rallying when everything else was cratering.
3) Dow trannies hung in there.
4) Vix double-topped and didn’t come near its previous high, confirming an overall uptrend (we also had a huge divergence from the previous Vix low that almost always signals a turn is on the way).
Of course these things are known to all and the market is priced to perfection, so who knows? Usually when everybody expects the market to do one thing, it does the opposite. Except when it doesn’t.
May 14th, 2004
You could also argue that the SOX is leading the way to head-fake the bulls. Today, the 50DMA crossed under the 200DMA…very ominous, especially with BOTH providing some serious overhead resistance to any more advance in the semis. Also, look at the overall trend. Definitely down. Definitely a wicked series of lower highs and lower lows. It is hard for me to get too excited about this potential bottom. Seeing will definitely be believing…!
May 14th, 2004
The nasdaq’s failure to join the Wednesday rally was the biggest hint that this bottom wasn’t “the” bottom. and there’s the nasty fact that the dow set a new lower low on this downlet.
The great fun about the market is that it does the exact opposite of whatever I say, even when I try to use reverse logic. (this should be my hint that the proper place for my money is under the mattress).
May 14th, 2004
Options week tends to be positive. Especially if the week before was negative. Tends to be.
May 15th, 2004
I have seen this mentioned a few times. I have cranked the numbers and hoep to post my results soon…
May 15th, 2004
I posted results at http://www.drduru.com/money/money.html. Scroll down to “DrDuru Special.” Should be self-explanatory and there should be enough details for anyone interested to follow the calculations. I think the data validates that options expiration week tends to be positive as compared to the close of the following week. Note the large variance from year-to-year. You can probably come to other insights if you look close enough. Enjoy!
May 15th, 2004
After looking more closely at the numbers, I don’t think betting on an up week during options expiration is such a clear-cut strategy. You probably also have to condition any such bets on what the prevailing trend is and what index you are talking about. (I was surprised to see how differently the Nazz performs from the S&P on this measure - its upward bias is much weaker) After it’s all said and done, there may be too little difference in the options expiry week from other weeks to bother with. I’ll be interested is seeing whether any one has any other thoughts or corrections on this.
May 15th, 2004
Sorry for splitting this up into so many notes…one last point. Note that for the past three months expiration week has been down…And only in February was the market (S&P) even up in the prior week. To me, given this is abnormal relative to the recent historical pattern, it is another indication that something fundamental may have just changed in the market. During the bear rally of 2003, options expiration week was up period - just like most other weeks!