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Have We Seen A Definitive Bottom Already? at Trader’s Narrative

At the risk of wearing out the welcome of this technical indicator…

Towards the end of June, something quite rare happened. Something that hadn’t happened in the stock market for more than 5 years!

… zero Dow Jones Industrial component stocks traded above their 50 day moving average.

The last time we saw this was in January and February 2003. Sure, there were many times that the percentage of Dow components trading above their intermediate moving average approached very low levels. And each of those times usually corresponded with an important inflection point in the index.

But zero? That makes you stand up and take notice.

percent dow jones stocks above 50 MA long term

Looking at this very long term chart, one can’t help but automatically assume that the percentage of Dow Jones components trading above their 50 day moving average and the end of the bear market coincided with each other perfectly.

However, zooming into the chart we see that things are not that simple:

dow jones bear market 2003 zoom

percent dow jones above 50 MA zoom 2003

In fact, once the percentage of Dow Jones stocks above their 50 day moving average reached zero, the Dow Jones index continued to fall. In fact, if you close your eyes and imagine, it must have been terribly frightening to have such a reliable indicator hit the most extreme levels and to have no foreseeable effect on prices!

Equities fell, almost non-stop for what must have seemed like an eternity but was only another month. The definitive bottom was reached in mid March 2003 but by then, as you can see on the chart above, the percentage of Dow Jones components trading above their 50 day moving average had already recovered.

Now, let’s fast forward to today’s market and zoom into the charts:

dow jones bear market 2008 zoom

percent dow jones above 50 MA zoom 2008

On June 20th 2008, there were zero Dow Jones components trading above their 50 day moving average. But the market continued to fall, just as it had after the same signal in 2003.

Of course, the only difference is that with the 2003 charts, we have the advantage of hindsight and know exactly when to call the definitive market bottom. With the more current charts, we are handicapped by the ‘hard right edge’.

Only time will settle the question of whether we have already seen the definitive market bottom already but it is rather uncanny to see such similarities, wouldn’t you say?

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6 Responses to “Have We Seen A Definitive Bottom Already?”  

  1. 1 jkw

    Are we supposed to ignore the indicator hitting 0 in 2002? Or was that a long term bottom in some other sense? Did this happen at any other times from 2000-2003?

  2. 2 Babak

    jkw, good point. When the indicator hit the extreme in 2002 it looked as if it was a long term bottom and a lot of people thought it was - only to be shocked in 2003. I think the reason the market finally found a lasting bottom was that it thrashed around so much that it caused a lot of despair for even the most dyed in the wool bull. There was a complete washout as prices spiked lower three times July 2002, October 2002 and then March 2003. I don’t have data for 2000-2002 but it would be interesting to see what happened in the market during those times.

  3. 3 evan

    It seems that almost any trading system will work if you trade with the prevailing trend. Have you given much thought on devising an intermediate to long-term market direction indicator? Something that requires no intuition, just simple boolean logic; true or false, up or down.

  4. 4 Babak

    evan, from the tools that I use, there is only one such indicator which is quantitative and fits what you are describing: the Coppock Guide

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