Timing Market Turns

How to Call a Bottom

A bottom is a turning point, a level at which an old downtrend ends and a new uptrend begins. Sometimes between the end of the old downtrend and the beginning of a new uptrend there is a flat period, also known as a "trendless" or "trading range" market. It doesn't matter whether this in-between period happens or not, what I'm going to explain will work anyway.

Lots of people can study most any market and determine whether it is undervalued or overvalued. Few can make money by trading it.

The reason that "calling a bottom" (or "calling a top" for that matter) is so difficult and costs overeager traders so much money is that a trend almost always goes further in price level and lasts longer in time duration than the vast majority of traders believed it would. The only exceptions are when outside forces such as sudden major fundamental news developments intervene to change the trend. Otherwise, in the normal progression of a trend, it does not end until all those who were fighting the trend have given up. In a downtrend the losers are the owners and the downtrend continues as they lose more and more of their money, and one by one they reach the desperation point where they sell out. As this process gradually unfolds, the downtrend continues.

Eventually the losers have all taken their losses and remain passively on the sidelines unwilling or unable to fight it any more, unable to afford any more losses. Thus, finally, the fuel on which the trend feeds (the losers' reluctant but finally agressive selling) is exhausted, and the trend ends.



So most traders who attempt to call a bottom buy in too early and get forced out with losses before the uptrend they expect begins. Even if their fundamental and/or technical and/or psychological sentiment analysis is proven correct in the long-term, they are killed in the short-term, so they never get the chance to profit from their superior and prescient knowledge. Instead they lose their money. Ironically it would have been better if they had no such knowledge at all, and kept what little money they had to start with in their own pockets, instead of foolishly and carelessly putting it into the pockets of their competitors.

Now what I'm about to teach you goes against the natural logical tendencies of most people. That's why most people lose their money trading, while the few who understand this (and have the maturity and discipline to do it right) make a good living, not "from" the market, but "in" the market -- "from" the losers, that's where their profits come from.

When calling a bottom, wait for a rally and sell it short.

That's right, sell it short. Most people will wait for a rally and then buy, thinking they are being particularly prudent and displaying superhuman patience (not buying on the way down or "catching a falling knife") but waiting for that little U-turn that they think is the end of the old downtrend and the start of the new uptrend. As soon as they buy, displaying in reality neither prudence nor patience but only common gullibility, they are cleaned out by the pros who slap the market down to yet another marginally lower low and shake them out. If the marginally lower low does not shake out the amateur public investor trying to get in on their game, you can be assured that a shockingly lower low, even a historic one, will be manufactured especially for them, whatever it takes to get them out and pocket their money. Do you realize that the pros can see not just your opening orders but also your "protective" closing stops which they will gun for and also your current total open position that they will try to blow you out of?

So you see, by selling the rally short you will be trading with the pros and against the common herd of losers. Thus you have a chance to win. Since your orders are relatively small in size and people like you are few in number, the pros won't care that you're profiting from their manipulation. You will be like a flea clinging on for the ride, insignificant compared to the masses of losers that the pros are focusing on shaking out with losses. And you can be sure that's what will happen over and over and over again before the actual bottom is in. Time and price do not matter. They will continue to drive it lower beyond all sane (and by the way completely irrelevant) fundamental valuation measures, UNTIL THE SUPPLY OF SUCKERS FIGHTING THE TREND HAS DWINDLED TO SUCH A TINY LEVEL THAT THEY'RE NOT WORTH STEALING FROM ANYMORE -- THAT'S WHEN AND WHERE THE DOWNTREND WILL END.



If you want to feel important you can continue to fight the trend, and thereby extend it (if you any money left and you are part of a still big enough crowd of suckers to make it worthwhile for the pros to continue to fleece them). But if you want to make money, simply sell every rally and cover on every subsequent decline until it is no longer profitable to do so. True, it's emotionally very difficult to sell short an undervalued market with huge upside potential that has just started to rally off a record low. That's why it's difficult to make money trading. That's why there will always be more losers than winners. The few winners consistently make a lot of money while the doomed members of the herd of losers each surrender as much as they can afford to (or slightly more) and then quit, defeated. Having wasted their market research calling a bottom, they then retire to the losers' den to waste their time pondering their bad luck and the irrationality of the markets.

Now eventually the final bottom will be in, and selling short that rally will result in an unrecoverable loss on that trade because the downtrend will be over, and it will be obvious that it's over because the retracement will extend so far and the market will start to make higher highs and higher lows (recognizing a trend change after it happens is easy -- the money is made in trading it correctly before it ends). But in the meantime you will likely have locked in several profitable trades the easy way, trading with the trend as the pros repeatedly shake out the ill-fated early bulls. And after you take your loss on your final bottom-calling short-sale trade, you can start to properly trade the uptrend, and soon recoup that single loss.

Note that your profits near the end of the downtrend are likely to be both quick and big because the largest sharpest moves usually come near the end of a trend. That's why "calling a bottom" correctly is so profitable.

And now you know how to do it.

How to Call a Top

When calling a top, wait for a sell-off and then buy it long.