Is This a Classic Double Bottom?

02/18/2009 10:14 am EST


Price Headley

Founder and Chief Analyst,

After the long weekend, traders are in no mood to buy stocks, and given the dark news that we've seen, it's really no surprise. One thing to note is the currency and metals trade. The dollar has been showing great strength of late, as have gold and silver, a dichotomous relationship. Strikingly, the safe play is into treasury bonds, even with a large dose of supply on the horizon. The stimulus bill will be enacted, a financial plan is still a mystery, and foreign countries are being hit left and right by toxic assets and forced sales. Is there any relief coming?

The Classic Double Bottom?

Markets rarely move higher without some significant test of a low, or a double bottom. One of the reasons technicians point to about the drop in 2008 was an absence of testing of the quick bottom in August 2007. The market surged from there and never looked back until it faltered months later, but by that time, the horse was out of the barn and sellers swamped the market. This time around, I expect we'll see this test, and it's quite possible it will be seen this week.

Dow Jones Industrial Average Daily Chart

C and BAC: Coincidence or Not?

November 20 and 21 was a watershed event. It seemed as if banks were falling off a cliff, and the biggest one of all, Citigroup, was about to fall into bankruptcy. Volume exceeded a billion shares in this stock on November 21, and including the previous two days, it was more than 2 billion shares! All those shares changing hands is remarkable and was quite telling. Everyone wanted out. Then the government stepped in with a bailout plan, and back up the stock went along with the market to a 20% gain in little over two weeks.

Then, on February 4, came another big event, this one being Bank of America. Fresh from their buyout of Merrill Lynch, this major institution was on the ropes from the beginning of the year. Climax selling occurred in early February to the tune of 1.6 billion shares over three days as the stock lost 50% of its value. Other banks went into freefall too, but a recovery ensued. Why do I point this out? Market prices were nearly at the same levels each time! While this is no guarantee of a bottom, this may be a first step.

No Signs of Recovery, but Stability Perhaps

The market is still range-bound and is likely to be there for some time to come. The longer the range exists, the more resistance and support levels become evident. This twisting and turning is classic bear market behavior. There is not much to do other than trade the ranges, or not. Do we want to keep trading dollars back and forth? One thing this bear market has taught us is that patience is critical. And when we do get involved, a quick trigger finger is not a bad idea. Bear markets tend to wear you out, not scare you out. Volatility levels have simmered down a bit, but we are constantly reminded of the violent swings.

By Price Headley, founder and chief analyst,

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