Probing for a Major Market Top or Bottom
By L.A. Little
When trying to time a major market top or major market bottom there are a number of factors that require
consideration. Qualified trends are a large part of the equation. Changes in quality and direction of the trend as
witnessed in key stocks on the short term time frame can lead to changes in sectors and eventually the indexes on
the same time frames. Figure 1 is a visualization of one slice of the market and kinds of the relationships that
Now consider that a stock trend, sector trend or trend in
a general market index is no different than an appliance in your kitchen. Both are created and eventually
destroyed. Each has a life cycle and a failure probability curve. The longer the kitchen appliance is used, the
higher the probability for its eventual failure. The same is true of trends. That is information you can use if
you know what the probability curve looks like. It’s another item that can be examined for potential market tops
and market bottoms.
Figure 2 below is an example of just what such a failure
rate curve looks like. In this example, a confirmed bullish transition to sideways on the short term time frame
using data from 2002 through 2011. Failure rates are plotted as a function of some number of bars. The longer
the trend continues, the greater the probability that it will correct.
Continuing this thought of failure probabilities a bit
farther, these failure matrixes exist on multiple time frames – not just one. There are long term time frames,
intermediate term ones and short term time frames. There are bullish and bearish trends and within that suspect
and confirmed ones. Sometimes they are synchronized – many times not. The highest probability of timing a major
market turn is to have enough of these time frames line up and then all fail together.
Attempting to determine a potential stock market top or
bottom is not a process of simply looking at one indicator and declaring it’s over. The three indicators above
are part of the process and there’s more. To find out about how major market tops and bottoms form and how you
can probe for one, then join me on Friday, March 2nd 2012 at 1:00pm ET at the Traders Online World
Expo Seminar. Hope to see you there.