FA Center: Once the market tests its June 2022 low, stocks will be poised to move higher. We’re not there yet.

by | Sep 21, 2022 | Stock Market

There’s still too much bullishness on Wall Street, even after the Dow Jones Industrial Average’s
DJIA,
-1.70%
500+ point drop Wednesday following the Federal Reserve’s latest meeting and rate hike. Consider all the attention given to a possible “double bottom.” By framing the market’s weakness in this way, the bulls are trying to put a positive spin on the market’s decline — which has already sliced 12% off the S&P 500
SPX,
-1.71%
since the mid-August highs and 15% off the Nasdaq Composite
COMP,
-1.79%.

A double bottom occurs when the market forms an initial low, rallies for a while, subsequently falls back to that initial low but doesn’t fall significantly lower, and then begins a major new leg up. It would of course be good news if the market were to follow this script. But there’s no way of knowing in advance. The comments about double bottoms made by Robert Edwards and John Magee, authors of the Bible on technical analysis entitled “Technical Analysis of Stock Trends,” are telling. They write that double bottoms (along with double tops, the bull market functional equivalent) are “referred to by name perhaps more often than any other chart pattern by traders who possess a smattering of technical ‘lingo’ but little organized knowledge of technical facts…. [True] Double Bottoms are exceedingly rare… And the true patterns can seldom be positively detected until prices have gone quite a long way from them. They can never be foretold, or identified as soon as they occur, from chart data alone.” Given this, the recent surge of attention to double bottoms suggests we’re still early in progressing through the five stages of bear market grief that I have discussed before — Denial, Anger, Bargaining, Depression, and Acceptance. Celebrating a market decline as setting up a bullish double-bottom formation indicates that we’re no further than the “Bargaining” stage — with Depression and Acceptance still to come.Bottom-fishing As Edwards and Magee point out, the chart formation alone is of little help foretelling whether the market’s second wave down will end at the same level as the lows of its initial decline. But are there non-chart factors that provide us with valuable straws in the wind? To gain insight, I reached out to Hayes Martin (president of the advisory firm Market Extremes) and David Aronson (a statistician who has authored several books on how to base your investment decisions on a sound statistical foundation, including Evidence-Based Technical Analysis). On the one hand, both told me, the factors that indica …

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