Saturday, August 25, 2007

V-Shaped vs. Double Bottom

I have watched Fast Money for the last time. On Friday they declared that the bottom is in and that a retest of the lows is not needed. They also stated that rising on lower volume is a bullish sign.

Wow, how crazy is that? Volume confirming price is a general rule for technical analysis.

I looked back at some recent corrections and the mild bear market of 2004. While it is true that volume can be light while coming out of a correction, if that correction comes in the midst of a bull market, a retest of the high volume lows almost always takes place. Anytime you see a V-shaped base that is usually a bad sign for the medium to long term. William O'Neil has studied many bases of many stocks and he always says to avoid the V-shaped base. They work sometimes, but have a high failure rate.

I'm showing the correction of 2005, 2006 and the bear market of 2004. Notice the 3 V-shaped bases during the bear market. You will also find many V-shaped bases during the 2000-2003 bear market. Notice also how well the TD-Sequential worked for the two corrections I show below.

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