SUMMARY OF STOCK MARKET 101 ANALYSIS:
Stock Markets are cyclical in nature. A great deal of effort has been put forward to timing the start and end of bull and bear markets and market corrections. After review of almost every correction of the Dow index corrections since 1928 a distinct pattern developed, the indexes fairly consistently rose above the moving averages and fell below the moving averages. In addition, stock market indexes seemed to make corrections of varying size and complexity after investor optimism rose to extreme levels then changed direction. A change in investor optimism may be the most difficult measure to gage but several indictors have been fairly successful at estimating the timing of a change in conditions.
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Stock Market Corrections often start with the index moving below the 10 day moving average ("10 dma") Movement below the 10 dma is not enough to determine a future market correction as the market can whipsaw back and forth over the 10 dma often, however, sustained durations under the 10 dma seem to be a common formula for a market correction. The opposite is true for the bull market, note the blue line on the above chart indicating the 10 dma. In generalities, the nasdaq rises with the index priced above the 10 dma and falls with the index below the 10 dma.
Stock Market Corrections sometime exhibit traits of selling off in waves, an initial sell off, rally, a secondary sell off etc. In the example above the Nasdaq stock market initially sold off in 12 trading days correcting more than 35% below the index peak. Many of the Bear Market Corrections reviewed have a first wave of correction, followed by a rally, followed by a second phase of correction, etc. The rallies after the first wave of correction can be quite large in terms of a percentage. For example, after initial wave of 35% downward correction, the Nasdaq then made an short term upward movement of over 20% in ten trading days, then another downward movement of 20% in 16 trading days.
Stock Indexes sometimes show support during corrections at commonly followed moving averages such as the 50 dma or 200 dma. As indicated in the above chart of the Shanghai market, the index was supported with buyers at the 50 dma as a strategy to purchase stocks at a cheaper value on the way up to bigger gains. This strategy is not without risk as once the indexes cross below the support the brisk downward movement can leave buyers with a losing basket of recent buys.
CLASSIFICATION OF STOCK MARKET CORRECTIONS:
In order to be considered a stock market correction, the 50 dma and 200 dma must be a positive (or upward) slope, graphically similar to a "/" for a sustained period of time typically greater than 6 months..
Class I Stock Market Correction: A downward movement of 5% or greater combined with the index moving below the 10 dma which doesn't result in a change of the slope of the 50 dma from a positive slope("/") to a negative slope("\"). The Class I Stock Market Correction is a fairly frequent in nature. The Class I Stock Market Correction dips commonly occur annually and are often considered adjustments along the way to a larger bull market. Class I corrections tend to bounce off from major areas of support like the 50 dma.
Class II Stock Market Corrections: A downward adjustment from the index peak with the index and 10 dma fall below the 50 dma but above the 200 dma .
Class III Stock Market Corrections: A downward adjustment from the index peak with the index crossed below the 200 dma. The 200 dma is positive slope.
Class IV Stock Market Correction: A downward adjustment in which the index is below the 200 dma for a sustained period that results in the 200 dma conversion from a positive slope to a negative slope. The 50 dma and the 200 dma both have negative slope.
Class III and IV Stock Market Corrections sometimes occur when: * The index starts moving below the 10 dma. ( see above) * The market index has risen over a multi-year period of time.
This could be classified as a stock market with a rising 200 dma for
multi-year period. * Investment Dollars leave the stock market. This might be
measured by money flow of the market. Several measures can be used,
including the Chalkin Money Flow(CMF) and the Money Flow Index(MFI) and
volume of trading on down index days in comparison to volume of trading on on up
index days. * Investor optimism achieves a excessive level and then changes
negatively. Investor Optimism can be measured with many different methods, however,
excessive optimism without the resulting change to less optimistic or negative
can be difficult to measure. Common Optimism Measures include: Put/Call Ratio: An excessively low put/call ratio indicates a bullish
complacency. Percentage of Investment Advisors Bullish: Excessive optimism indicates
bullish complacency Percentage of Investment Advisors Bearish: A low percentage indicates a
bullish complacency Volatility Index: A low volatility index indicates a bullish
complacency Short Interest Ratio: A very low short interest ratio is bullish
complacency Relative Strength Index: A spike of the relative strength index above
70 is considered overbought Number of Point and Figure charts bullish: An excessive number of point
and figure charts may indicate bullish complacency
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