Who cares where the bottom is?
Buying at the bottom is just another one of Wall Street's dangerous myths

by Adam Lass

Was that the bottom? A lousy question. Here’s a better one: What are you willing to pay to find out?

How much pain can you take to prove a point? Are you willing to look your wife in the eye and tell her you lost another 25% of your retirement money to get in on the bottom of a V-shaped recovery? Hope you have a soft couch, because that’s where you’ll be sleeping.

And you know what? She’s wrong, and you’re right, but it doesn’t matter anymore. She’ll just tell you that those Wall Street shysters ripped you off again. I know this conversation by heart.

Born wrong

Despite the fact that my own trading account never lost a nickel during the crash, despite the fact that it was the allegedly conservative, supposedly diversified mutual fund shares she made me buy “just to be safe” that burned up dollars like Nevada timber, despite the fact that we never bought the smoke that the 19-year-old mutual fund geniuses, smirking dot-com IT freaks, Gucci-suited brokerage hucksters and recently-indicted billion-dollar hired gun executives were blowing up our rears, we were in charge and we were wrong.

Our wives are in charge now, and their risk tolerance is zilch. This is not a bad thing. I am a hunter: my job is to go out a kill a squirrel and call it a bison. My wife’s job is to make that squirrel feed a family of four for two weeks until the big bad caveman comes back with another one.

She does this every week, year after year. And has never proposed feeding me to the snarling brood. So I totally worship her. She is much smarter than I am.

This is not sexism: I am drawing on personal experience. If yours is different, fine. Write your own column. I’ll bet my coffee-time doughnut that most of you are in the same boat as me.

When will the pain end?

Here’s what that means, predictionwise:

First and foremost, until our spouses forget about the market entirely—the whole damn thing, 401(k)s, IRAs, Roths, retirement funds, the works—the money is going to stay in real estate for now. That’s what “capitulation” means: when people who know nothing about something stop obsessing about it. When the real-estate bubble bursts (and eventually it will… they always do), maybe they will let us put a leetle bit back in the market.

That means the market may dip and it may rally, but you’d better have a foolproof way to jump on it. Any regular reader of my rants knows where I’m headed: short-term trading is the only way you’re going to stay ahead in the current market. And I think I’m pretty good. Check out the email I just got from W.Z.:

“Today I closed out your latest recommendation with an $85,000 profit. I’m overjoyed to think with all that is going on in the market each day that you are able to provide us traders with such a unique and profitable system. Many thanks!”

That’s US$80K in about three days. Oh yes!

Swellheaded? You bet, but to honest, anyone of us—DeHaemer, Ryle, Hicks, Cooper, Ng or Bottarelli and I—have interesting tweaks on how to do it, and track records to back it up. Remember: even if we are grinding out a genuine bottom, “buy and hold” is going to buy you many, many nights on the couch.

Still bottom hunting?

Still you ask: “Was that a bottom?”

Let me answer this as specifically as I can: Maybe, maybe not.

It all depends on whether that was a bottom or not. (Don’t you hate weasely, conditional answers like that? I know I do.) Let me see if I can be more specific.

We have reached two critical “threshold moments”: the first was the NASDAQ’s declining 100% retracement of its skyrocket ride from 10/98’s 1,357 to 03/00’s 5,132. In fact, the NASDAQ has even gone a bit below that, dipping as far as 1,192, but is currently holding on around 1,330, despite continuous pummeling in the news.

The second moment was the Dow’s headfirst tumble to 7,489, a close-enough match to 10/98’s 7,399 low to qualify as a declining 100% retracement. To a technical analyst’s eye, these moments have sufficient import on their own to warrant pausing for reflection… or at least temporarily backing off from any short position.

Just the facts, ma’am

But most investors want a story to go along with the cold numerical facts, so here’s my humanist interpretation: the Internet bubble’s theory that profits don’t matter in the “new economy” has been thoroughly repudiated—first in theory, and now in cold, hard cash. Stocks are now selling for about what they fetched before the phrase “irrational exuberance” was permanently etched in every investor’s lexicon.

That’s what the market does: it tests ideas, rewarding good ones while discarding the dross. Now that this process is nearing completion, a large number of traders tend to pause in reflection. “What will happen next?” becomes the big Q on all lips. Lo and behold, the market has reacted: the shorts have backed off and the eternally optimistic bulls have control—for a day or two, anyway.

I’m told that it’s my job to reveal the answer to that question. I have a confession to make: not only don’t I know “for a fact” what will happen next, I never did capital-K “know.” All I have ever claimed to have access to was a system—WaveStrength Analysis™—that was damned effective at serving up what was likely to happen, a.k.a. “probable scenarios.”

Possible good news

Here are the most probable scenarios currently available to me (I’ll warn you now: this is the weasely part). IF we hold here, a rebound to the Dow’s ascending 38.20% retracement mark at 9,020 is very likely. And having already crossed the 23.60% mark at 8,434 with such alacrity, I’d say that is looking more probable by the day.

But you know what? I’d be inclined to short the Dow again at that point.

Maybe only for the short term, and with a close eye on trailing stops, or better yet a good hedge. But the short players will remain pretty much unconvinced of the inherent value of this market until proven otherwise. And so long as every rally gets shorted by the pros, that’s where you’ll find me, too.

Probable bad news

Because the other side of my if/then story, the downside scenario, is just too brutal to ignore: IF this bottom does not hold, the next Fibonacci support level is 161.80% at 4,612.

Need I say more?