A financial blog on investing in stocks, commodities and the gold bull market.
Tuesday, June 3, 2008
Where is the bottom?
There seems to be a preoccupation with trying to pick the bottom in the housing and financial sectors lately. I guess I can understand the reasoning since I don't really expect the market to enter into a significant new bull market until these two sectors especially the banks bottom.
Let's look at a broken sector and two previous bubbles to see if we can find any clues to what we should look for to spot the bottom.
The airline sector took a huge hit on 911 that continued as oil started to climb. The Fed is virtually crushing any hope for the recovery of this industry with their inflationary policies. It's been 7 years and no sign of a bottom yet.
Next we see the collapse of the tech bubble. It's been 5 years and still no sign of a major recovery to new highs.
The Nikkei bubble popped in 1990. it's now been 18 years and again because of the Japanese unwillingness to let segments of the financial system fail we see no sign of the Nikkei pulling out of the secular bear market.
Now look at the housing index. Only 2 1/2 years have passed. Inventory is still building. We have another wave of foreclosures yet to come this year. They haven't even started yet much less hit the banking system.
The BKX is down a little over a year. The Fed is following the same course as Japan and trying to prop up the financial system.
After looking at the other three charts does anyone really think that we are even remotely close to seeing the final bottom in these two sectors?
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T1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected. T2. Reversal or resistance to a move is likely to be encountered: - 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range - On approaching highs or lows T3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently. T4. Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken. T5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places. T6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side. T7. Watch for volume climax, especially after a long move. T8. Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps. T9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.
General Trading rules
G1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move. G2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases. G3. Limit losses and ride profits, irrespective of all other rules. G4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing. G5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal. G6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation the the chart formation. G7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100% G8. In taking a position, price orders are allowable. In closing a position, use market orders." G9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules. G10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag. G11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.
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