Retest of the October Lows

Thursday, November 13, 2008 | 07:17 AM

Markets have come increasingly close to their October 10th lows. Contrary to what you may have read or heard on TV, this is precisely as it should be.

Why? Major lows get retested. That is a basic tenet of market behavior, and crowd psychology. This has been verified by a variety of studies by different technicians, economists and traders.

There are a variety of different ways to define the terms, yielding some variations, but the basic outline remains the same: All major sell offs hit a point where markets become so deeply oversold, that a rally ensues. Depending upon how deep the prior sell off is, this rally typically lasts anywhere from 3 to 6 weeks. Our work at FusionIQ shows that these snap-backs typically go for about 4 weeks and average ~24%.

Others have come up with some variations of these findings: David Rosenberg of Merrill Lynch looked at the 12 biggest market bottoms of the past century; he found that 35 days is a good rule of thumb for the length of time for the rally and retest (today is day 32).  Justin Mamis developed a variation on this theme of bottom, rally, retest, rally. Ned Davis Research has also written on the subject.


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Thursday, November 13, 2008 | 07:17 AM | Permalink add to | digg digg this! | technorati add to technorati | email email this post


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