In 2002, Paul Desmond won the 2002 Charles H. Dow Award for his work in identifying market bottoms and new bull markets. Since this work nicely supports Wyckoff's hypotheses regarding selling climaxes, technical rallies, and "secondary reactions", or tests, I've posted Desmond's study below in pdf form. I've also excerpted several points which are particularly pertinent to Wyckoff's aforementioned hypotheses and which will act as an introduction to the study. Please note that all bolding is mine.
To spot an important market bottom, almost as it is happening, requires a close examination of the forces of supply and demand – the buying and selling that takes place during the decline to the market low - as well as during the subsequent reversal point. Important market bottoms are preceded by, and result from, important market declines. And, important market declines are, for the most part, a study in the extremes of human emotion. The intensity of their emotions can be statistically measured through their purchases and sales.
[P]anic selling must be measured in terms of intensity, rather than just activity.
It is essential to recognize that days of panic selling [in which Downside Volume equaled 90.0% or more of the total of Upside Volume plus Downside Volume, and Points Lost equaled 90.0% or more of the total of Points Gained plus Points Lost] cannot, by themselves, produce a market reversal, any more than simply lowering the sale price on a house will suddenly produce an enthusiastic buyer. As the Law of Supply and Demand would emphasize, it takes strong Demand, not just a reduction in Supply, to cause prices to rise substantially....These two events – panic selling (one or more 90% Downside Days) and panic buying (a 90% Upside Day...) – produce very powerful probabilities that a major trend reversal has begun….
Not all of these combination patterns – 90% Down and 90% Up – have occurred at major market bottoms. But, by observing the occurrence of 90% Days, investors have (1) been able to avoid buying too soon in a rapidly declining market, and (2) been able to identify many major turning points in their very early stages – usually far faster than with other forms of fundamental or technical trend analysis.
Impressive, big-volume “snap-back” [technical] rallies lasting from two to seven days commonly follow quickly after 90% Downside Days, and can be very advantageous for nimble traders. But, as a general rule, longerterm investors should not be in a hurry to buy back into a market containing multiple 90% Downside Days, and should probably view snapback rallies as opportunities to move to a more defensive position.
The following is of course a chart of the Nasdaq over the past few months up through yesterday and is intended as an example. The calculations are not guaranteed to be accurate. Anyone caring to verify them and point out any errors is welcome to do so. Readers are encouraged to read the study in its entirety.
As you probably already know Db , I follow the 90% days on the NYSE , which coincides with Desmond's work. Those down days were Sept 29th, Oct 6th and Oct 9th , with the up day on the 13th. That is 90% as in both volume and issues together.
erie
Very insightful, thanks for the post db. So if I'm understanding this correctly, it seems like we are at the major market bottom and the rally on Monday is not just a "snapback rally" but a rally driven by strong demand. If this is true, is it expected that there will be a (long) period of consolidation before prices start going higher?
Thanks.
Last edited by cowseathay; 10-14-2008 at 11:38 PM.
We're at "a" bottom, but not necessarily "the" bottom (look at what happened in 1930). And a "snapback" or "technical" rally are both driven by strong demand. If they weren't, price wouldn't rise. What distinguishes a snapback or technical rally from a genuine rally is whether buyers intend to keep the shares or are buying them just to cover short positions and whether the "hands" doing the buying are weak or strong. If weak, the shares will be tossed back into the market at the first sign of trouble, which is what the test is all about (if none of the shares were thrown back, you'd have a "V" bottom). What both Desmond and Wyckoff counsel is to avoid buying too soon, and both provide ways (essentially the same ways) of enabling the investor to avoid doing so.
As for a lengthy period of consolidation, the bottom six years ago took at least six months to form. Traders looking to invest may want to focus on bargains that pay dividends so that they are at least somewhat compensated for the time they spend waiting for their stocks to begin to re-appreciate.
Do you have data for 2002 and the first half of 2003?
Let me look and see if I have something saved on a disk. Right now I have from Aug28th/03 and on. ( wouldn't ya know it ) I do remember sending you a copy once of my spreadsheet, by chance would you still have it?
erie
Can't find it. But I'm interested only in the "90" days. If you don't have that already, it would be a lot of work. If you do, I'll put together a chart like the one above.
10-14-2008, 03:07 PM
Linear Mode
