In the aftermath of the volatility from the past week, there is one question on everyone's lips: is this the bottom and, corresponsidnly, was the BABA IPO the top? Because if nothing else, all the churning action from the past week has only provided a great opportunity for banks to pad their flow business revenues since collapsing trading volumes over the past few years have finally reversed and in fact, exploded higher, if only for the time being.
Still, few are the market makers that make money no matter what the market does (especially since HFT firms, long since exposed for merely frontrunning big order blocks instead of providing liquidity, are now disappearing at an accelerating pace), and there are those who, rigged casino analogies notwithstanding, still want to place their money in the market betting on either more upside or downside. For their benefit a few days ago we posted "The "Crazy Ivan" Playbook: How To Time A Near-Term Market Bottom" however, we realize that most people are visual learners, so for them, here is the Investor Business Daily's compendium of the most notable market tops and bottoms in recent market history.
First, the market bottoms:
Market bottoms are deciphered by your observing the daily price and volume action on the four major indices: the S&P 500, Nasdaq Composite, New York Stock Exchange (NYSE) Composite and Dow Jones Industrials. After the market makes a low, look for the first day the market closes up from the previous day. This is normally day one of a rally attempt. As long as the index is able to remain above the previous low, the attempted rally is in place.
The next step is to wait and watch for one or more of the four market indices to show a “follow-through day.” This is a day where the index closes up significantly on volume heavier than the previous day. The S&P 500 or NYSE Composite typically need to close up 1.7% or either the Nasdaq Composite or Dow Industrials need to close up 2.2% or more. The first three days of an attempted rally are too soon to judge if the market confirms its new uptrend by having a follow-through day. Follow-through days can happen on the fourth day or later of the rally attempt.
It is important to note that not all follow-through days lead to sustained new market uptrends. About 20-30% of the time they may fail fairly quickly. However, no bull market has ever started without a follow-through day…and it will occur when most people are unsure and afraid because the news during the decline was so negative that people become doubtful and hesitate to act on the confirmed new uptrend.
And the the market tops:
After a sustained market uptrend, there will always be signs when the advancing phase is over. These signs will come as the market is still advancing. The key signal the market may be in a topping process is an increase in the number of distribution days in at least one major market index. A typical distribution day is one that closes down from the previous day (at least -0.2%) on higher volume than the prior day. This is your first clue institutional investors are selling stocks.
Up to five distribution days over a period of four or five weeks usually signals that the market is beginning to top. In addition to days down, you should also look for stalling days. When you suspect a stalling day, be sure to observe the price action for the previous day. The day before a stalling day will show a significant price increase when compared to its previous day. The stalling day will show only a tiny amount of price progress compared to its previous day and volume either increases or remains heavy. This I call heavy volume without further price progress up.
Another thing to watch is the action of the leaders. As the market is topping many of your market leaders may also show topping signs themselves. In addition, you may find you need to sell a stock because it drops 7-8% below your purchase price. Pay attention when the market starts forcing you out; it can help you protect your capital.
And now that you read and saw all of that... forget everything and remember: in this rigged, manipulated "market" the only thing that matters is what the central banks do, which in turn only matters until the central banks finally destroy what little credibility they have left.