Looking for a bottom!

Without a doubt to consistently and correctly forecast the direction of financial markets either stocks, futures or currencies is a hazardous task. Therefore, rather than building our own bullish or bearish bias, we should continue to gather the facts, conduct research, and form an opinion while conceding we could be wrong. Be patient and observant and have an educated and open mind to what has happened and what is happening rather than emphasizing on forecasting. What we know and can do is process the information we have now with an understanding that the information will change in the future.

The simplest and popular analysis to discern between a bull and bear market is using simple moving averages. Look at the 5 years chart of KLCI below.

From 2004 to January 2008 bull run, the slope of 200 day EMA (the black line) is never negative, the 50 days EMA(the purple line) is above 200 days EMA vast majority of time.

The crossing from above of 200 days EMA by 50 days EMA in mid March signal the trend change from bull to bear. From that golden cross, the slope of 200 days EMA is never positive and 50 days EMA is always below 200 days EMA which denotes that the bear has taken over.

During the bull run, the market has crossed the 50 days EMA in a few occurrence indicating a correction but rebounded on the 200 days EMA with the exception in March 2008 where the golden cross occurred (the crossing of 200 EMA by 50 EMA).

Presently, we remain in a bear market, which means principal preservation is the primary objective. However, the recent declines in stocks have dropped valuations to levels where buyers will be more inclined to step forward. At some point, stocks will begin to transition from a bear market back to a bull market. It could occur relatively soon or may not happen for an extended period of time. Regardless of when the shift occurs, it is prudent to prepare for the transition.

On my previous post, I indicated there is a bearish head and shoulder pattern forming in late 2007 and early 2008 with a target support low of 830. In the previous post I also did mentioned that the Fibonacci retracement of 61.8% is at about 750 level.

Look at the 3 months chart of KLCI above with the 200 days EMA in black, 50 Days EMA in purple while the 20 days SMA is in red.

The index or market fall sharply with a gap to a lowest point at 801 on October 28th in line with around the globe market heavy slide downward. The market rebound or maybe corrected itself to 926 level on November 5th. At this level the index closed above the 20 days SMA indicating a minor rally but the subsequent two days before end of the week it fall and moved below the 20 days SMA.

Is the bear market going to be over i.e touch bottom?
The market first have to cross the 50 days EMA but please be reminded that past history shows how bear markets have trouble staying above the 50-day and 200 day moving averages. This what is term as false rallies.

It is important to keep our mind in perspective for all possible outcomes, even outcomes which are contrary to your view of the world. During a bull market, it is dangerous to become blindly bullish, especially after spectacular gains. Likewise, during a bear market, it is dangerous to become blindly bearish, especially after significant declines. . While the current bear market could continue for years, it could also be closer to its end than many are willing to even remotely concede. An open mind is an investor's best friend.

Charts are a good way to keep tabs on the human emotions of greed and fear. Often we made mistakes during the bear market by remaining fearful for too long as assets became attractively priced. We rather moved our money tucked safely in the bank (although currently it might not be a safe bet) than considering starting some cautious buying. People want to buy at the top and sit on their hands at market bottoms. It has always been that way and it will always be that way. Bottoms do not occur when conditions are perfect and it feels comfortable to invest.