Predicting market tops and bottoms...

**Chaser** · 05-20-2006, 05:53 PM

Everyone knows that the way to make money in the stock market is to “Buy low and sell high”. Applying this cliché means stocks should be bought at their worst and sold at their best, which is very hard to do psychologically. Knowing where the market tops and bottoms are seems to me to be the key to selling high and buying low.

While the lagging 20/50 ema is a good indicator of short term versus intermediate performance of a fund, on further reflection, it may not be the best indicator of cyclical market turns (market bottoms and tops). The excellent chart that Spaf uses in his “Kingdom of TSP” weekly reports contains RSI, 15/50 MA, SAR, & MACD charts.I use a CCI chart in place of Spaf’s Slow Sto chart. It is possible to see which of these charts best predict market tops and bottoms based on past performance.

If you load a sharp chart for a fund at stockcharts.com using a line instead of candlesticks for the sake of clarity in the chart type box and use the annotate function to draw vertical lines on the daily chart at the market tops and bottoms you can compare which indicators were best predictors for market tops and bottoms in the past.

At this point, it appears to me that the peaks and valleys of the MACD histogram best predict market tops and bottoms. The current bars on the histogram are extra large compared with the size of the histograms in the past shown on the chart. Does this mean it is a more powerful indicator? I don’t know; I’m just starting to try to figure this stuff out.

This analysis is easier done in hindsight of course. It is hard to know when a histogram is peaking on a daily basis and it can make a great deal of difference if buys or sells are not executed on a timely basis. The advantage to this method is that it is more of a real-time indicator compared with a moving average, which lags real-time conditions depending on how many days are used in the averaging calculation.

Other indicators can help determine when a MACD histogram is peaking and indicating a market top or a bottom. On Friday, May 19 there was a large black volume bar, which indicates a high volume price increase. There was only one other day that had a volume this large in 2006. Some say a high volume day with a price increase may show a healthy uptrend. The RSI and CCI charts show oversold conditions indicating a favorable time to buy.

To summarize: the MACD histogram confirmed by volume, CCI, and RSI indicators show that the market may be at a bottom and this may be a good time to buy. I am canceling my transfer from C to G and what I said above about the C fund seems to apply to the S and I stock funds as well. I think this is market bottom and is a good time to buy or hold the stock funds.

This is Spaf's chart from last week which I am using to illustrate what I'm talking about:

**robo** · 05-21-2006, 03:47 AM

Some indicators are flashing a Buy, but we could be in for a rough week.

You can bet Mr. Market will try and shake out as many weak Bulls as it can and then squeeze and slam the bears. It could get bloody next week. If you stay long buy some Pepto-Bismol. The smart play is cash until we get a clearer trend, but I'm playing the High Risk trade and staying long. When the Market is oversold it can get more oversold. I hope you are correct and we are close to a bottom, but it's never that easy.

The TA's I follow send me lots and lots of charts and explain why they are Long, Short or in Cash.

2 in cash one leaning long one thinking short

3 Long 60% to 100%

2 Shorting most Major indexs and Internationals

I hope you are correct Chaser!! Ever time I think I have a system using a mix of data the Market beats me. However, I make more good trades than bad and it is a game of percentages if you are trading short-term as many of us do.

Many on this board amaze me in some of the short term trades they make and many times make money. I'm more of a trend trader and conservative at that. Said I was going away in May and here I I'm trading High Risk Trades. Oh Boy!!

Some Comments from Mark Young about picking Market Tops and Bottoms:
I get his weekly newsletter. These are old comments, but very true.

Top picking has literally cost me millions, nay, TENS of millions in missed opportunties, and hard cash. I'm sure others can say the same.

Here's what I learned and took to heart:

Tops are built. There's no rush in picking them early. Most give you plenty of time to get short when risk is low and the trend has turned. If you want to pick something, pick bottoms--in a Bull market. They tend to be punctuated points.

Don't pick tops. It's too costly monetarily AND emotionally. It just doesn't make sense. You'll be worn out even if you're right, and thus blow out for a small profit or loss and miss the big move. That, in turn, will make you gunshy to take the next trade...which will also cost you. Then you'll turn into Hayrake.

I'm not saying that you can't probe counter trend with tight stops (I did today), but taking POSITIONS when picking a top is near suicide and a pointless one at that.

Mark
http://www.wallstreetsentiment.com/isa.htm

http://www.wallstreetsentiment.com/rules.htm

**Chaser** · 05-22-2006, 10:18 PM

Originally Posted by robo

The smart play is cash until we get a clearer trend, but I'm playing the High Risk trade and staying long. When the Market is oversold it can get more oversold. I hope you are correct and we are close to a bottom, but it's never that easy.

So much for my prediction of a bottom!

__________________________________________________ __________
It is better to keep your mouth shut and be thought a fool than to open it and remove all doubt.

**tsptalk** · 06-11-2006, 01:30 AM

Isn't the rule to use MACD type indicators for trending markets, and overbought/oversold type indicators for oscillating markets? I forget about this myself and get married to my indicators at times

Now, I just need to figure out if the market is trending or oscillating.

**Fivetears** · 06-11-2006, 03:09 AM

Forgive the major quote edit below, robo; trying to save space. I read the bottom link /rules and thought, these 5 Rules look like they are worth a try. If the sub-floor of this current market bottom we are standing on doesn't shift or fall out from under us next week, I may give this a shot. I've played the "2% up" rule, and the "three up sell - three down buy" rule and have done reasonably well, since TSP opened up the daily IFT door. But things are shifting & changing; market quakes (4yr CL's if you will). I've managed to avoid 2 of the previous 3 four year cycle lows only after learning about them on the internet in the late 1990's, and subsequently choosing to actively and aggressively invest in our TSP outside of this cycle period.
Thanks for the wallstreetsentiment links.

Originally Posted by robo

I'm not saying that you can't probe counter trend with tight stops (I did today), but taking POSITIONS when picking a top is near suicide and a pointless one at that.
Mark
http://www.wallstreetsentiment.com/isa.htm
http://www.wallstreetsentiment.com/rules.htm

**Fivetears** · 06-11-2006, 03:13 AM

I think it may be seismic activity, Tom.

Originally Posted by tsptalk

Isn't the rule to use MACD type indicators for trending markets, and overbought/oversold type indicators for oscillating markets? I forget about this myself and get married to my indicators at times.
Now, I just need to figure out if the market is trending or oscillating.