Saturday, July 05, 2008

Is The Dow Close To Putting In A Bottom?

Over the past couple of months the stock market has been selling off rather sharply with the Dow Jones Industrials leading the way down. I've been fortunate to be short DIA and several other dow related stocks for most of the decline but now I think we may see stocks bottom.

Above is a weekly chart of DIA and below that is DIA's volume with a bollinger band applied to the volume. In the bottom panel is %R which is an oscillator that shows overbought and oversold readings.

What I've noticed is that when DIA's volume moves OUTSIDE of the upper bollinger band COMBINED with an oversold reading in %R, the Dow is within a week or so of putting in a bottom! If you look at the above chart you will see numerous examples of this pattern calling the lows time and time again. Notice how volume as of last week moved above the bollinger band while %R is oversold which means DIA is close to a bottom in my opinion.

Right now I still have a short position in DIA so here is how I'm going to play this market. As long as the dow continues to move lower, I will stay short. My trailing stop to lock in profits on the short side is above last week's high.

As far as getting long stocks, I think we will see a bear market rally so I don't know if it's worth buying the Dow or S&P but you might want to try buying some of the commodity related stocks if they continue to show relative strength. I think if DIA can make a 2 week high (dow takes out the highest high in the last 2 weeks) that will confirm the bottom in stocks but keep in mind I think it will be a bear market rally so be very selective as to what you decide to buy.


BenjaminNg said...

Hi Kevin,

Great post. I think we should be close to a bottom but I am not sure when.

Anonymous said...

Hi manny here, during this downtrend I've noticed that DXD DOG ( short Etf's ) have been rising. Despite volatility if your in at good price you can hold these in a bear market. Your thoughts just curious ?(nice sight) thanks

Anonymous said...

Hi Kevin,

Any thoughts on the following chart?

1. 8/16/07 ("Shanghai Surprise")
minus 1,102.0
2. Low of 1/23/08: minus 867.0
3. Low of 3/17/08: minus 643.0
4. Low of 7/1/08: minus 518.0

Kevin said...

no opinion...sorry

Elaine said...


What level subscription do you need at to plot the indicators that you do?


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