In a bear market, there is always an intense focus on one issue — namely, has the market hit bottom? There has been endless debate about that issue lately, and there are compelling arguments for both sides. It certainly is a possibility that we have seen the lows, but it is a distracting question and should not be the most important issue for traders and investors to contemplate.
The reason there is so much talk about bottoms is that if we are comfortable in identifying one when it has occurred, then we can put our capital to work without worry. We just need to make that one determination and then pressure and indecision are lifted, and we can just wait for our stocks to go higher.
The problem with this approach is that it makes for lazy and undisciplined investing. We start to feel confident that the market will bail us out if we make a mistake and we tend toward inaction as we trust that a bottom in the market will protect us from big losses. We rush to put capital to work so that we are not left out of the new and glorious uptrend and life is good.
Another problem with becoming too focused on the bottom issue is that it tends to impair objectivity. Once we make that declaration, there is a tendency to constantly look for anything that supports what we already believe. We have a tendency to dismiss contrary arguments, and it is much easier to make mistakes when we become less flexible in our thinking.
The appeal of proclaiming that the market has hit bottom is easy to appreciate, but there are a series of more important issues to consider. The thing that is far more important than catching a market bottom is catching sustained momentum. We want to buy stocks when they have the best chance of a strong uptrend. That is why big bear market bounces cause so much excitement and optimism.
A bottom does not necessarily correspond with the best entry point. Ponder that statement a bit. Just because a stock or a market has hit a low is no guarantee that it is going to produce a strong trend. Stocks often languish for many years without retesting their lows. They aren’t great investments even though they have already hit bottom.
The most important issue to consider when looking at what we hope is a market low is whether charts are improving. A chart that has a low isn’t necessarily a good chart. It takes time for a solid chart to develop. The real power of chart development is that if we are patient and wait for clear support to build, then it makes risk management much easier. We have very clear stop levels, and new entry points have less risk when price action develops in the right way.
Rather than ask whether the market has hit bottom, focus on finding charts that have developed support levels and are starting to produce a series of higher highs and higher lows. When you find charts like this, then you don’t need to worry about whether the market has hit bottom. The stop-out and support levels will be clear. All you need to do is manage your trades. It is not necessary to engage in the debate over whether a bounce is also a market bottom.
The current market has quite a few folks convinced that we have seen a bottom for this cycle. I really don’t know. What I am focused on is finding charts that are developing strong support and provide clear stop-out levels should this current move turn into just another failed bear market bounce.
So instead of asking if this is a market bottom, focus on buying good charts and having a clear plan for exits as market conditions develop.