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Chuck's note regarding detecting a V-shaped bottom got me wondering how
often that sort of thing comes up in practice. The answer is suspected
is "not often", but it also depends upon how such things are measured.
Using NDX 100 data going back to 1990 (all I have), I defined a V-bottom
as one where a given low bar is -20% less than the highest high in the
prior 15 bars and -20% less than the highest high in the next 15 bars. I
whipped together a quick Tradestation "custom paint bar" study, which
marks a bar in Blue, if the V-bottom was detected at the low 15 bars
prior. With a little more programming, I could've painted the actual low
bar at the bottom, but perhaps it is better this way, because the bar is
painted at the point the V-bottom was detected.
Now, oddly enough, only in the timespan shown over the past 10 years did
this V-bottom appear. Note that there may have been other times where
there was a chart formation that looks like it might qualify visually as
a V-bottom, but that it took much more time before and after the bottom
to meet the substantial (-20%) criteria. Clearly, taking the signals in
Sept-1998 and Oct-1998 would've done no harm, though there was a wicked
retracement following the Sept-1998 peak. However, the signals in
June-2000 and Feb-2001 would've been just as equally unrewarding.
(the red indicator at the bottom of the page is the simple average of
Nasdaq Advances - Declines). Nothing much to say there except that the
Nasdaq is equally overbought as it was in Feb-2001. Still, as the March
2000 run up shows, that figure can get a lot, lot higher.
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