Back To Basics

03/16/09 09:31:05 AM

by Alan R. Northam

Is the stock market at the bottom and ready to start a new bull market, or is the stock market bottom still ahead of us? Let's go back to the basics of technical analysis to answer this question.

Security: $NYA
Position: N/A

Many traders, market analysts, and news reporters are looking at the recent stock market lows as the bottom of the bear market, which it may very well be. However, the recent market lows also may not be the bear market bottom. Let's get back to the basics of technical analysis and look at the evidence.

The very first thing a technical analyst should look at in analyzing the stock market is price. When we look at the daily price bars, we note that the stock market is continuing to make lower highs and lower lows (see LH and LL labels on Figure 1). To date, the market has not formed a higher low price followed by a higher high that could be an indication that a bottom is in place. When a market continues to make lower highs and lower lows, the market remains in a downward trend. Thus, based upon this simple analysis, there is no evidence of a stock market bottom and the trend of the stock market is still down.

FIGURE 1: $NYA, DAILY. This chart of the New York Stock Exchange Composite Index shows the daily trading bars and three moving averages. The labels LL and LH stand for lower low and lower high.

Graphic provided by: StockCharts.com.

Second, there has not been any major trend reversal price pattern develop on the price chart. A major trend reversal price pattern would be price patterns such as double bottoms, inverted head & shoulders, saucer or spike, and so on. Therefore, based upon this analysis, there is no evidence that a bottom in the stock market is in place, and thus the trend of the stock market is still downward.

Next let's look at moving averages. Moving averages are lagging indicators of price; they tell us where price has already been. As lagging indicators, when moving averages are pointing or moving downward, they tell us that the market has been in a downward trend. As long as price remains below these moving averages, the moving averages will continue to move lower. However, once these moving averages start moving upward, they tell us that the market trend is in an upward trend. In addition, we can identify different lengths of trend by using moving averages.

The 20-day moving average is a very popular average for measuring the short-term trend. The 50-day moving average is popular for measuring the intermediate-term trend and the 200-day moving average is a popular moving average for measuring the long-term trend. As can be seen from the price chart (Figure 1), all three of these moving averages are still moving in a downward direction.

From this analysis, it is easy to see that the short-, intermediate-, and long-term trends in the stock market is still downward, and again, there is no evidence that the trend of the stock market has changed from down to up.

In conclusion, price continues to make lower highs and lower lows, and all three moving averages continue to point downward, confirming that the market trend is downward. In addition, there has not been a major trend reversal price pattern develop on the price chart, signaling a change in trend. Until price moves above its moving averages, the trend of the stock market will remain in a downward trend.

Until price moves above its moving averages, there simply is no evidence to substantiate that a bottom in the stock market is in place.

Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at inquiry@tradersclassroom.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.

	Garland, Tx
Website:	www.tradersclassroom.com
E-mail address:	inquiry@tradersclassroom.com

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