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The Morning Cup of Jo

By

Those silly teletubbies!

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One good day and they all com-a-runnin'; gotta love it. Yesterday, on the "evil-black-box" (the TV), I must have heard 50 teletubbies (okay, maybe not 50) ask if the markets are at a bottom and if so is this a "V-Bottom?" Fascinating, to say the least. I love how they play on investors' emotions to sell advertisement.

I'm not going to take much of your time today, however; I do want to clear up a few points about bottoms. First of all I would like to point out that "V" patterns are unusual, rare and mostly unreliable when it comes to finding TRUE LT tops or bottoms technically. Nonetheless they do occur, but a large percentage of them get retested, which ends up creating a different technical pattern altogether.

Given the current technical environment we should start to focus on what a Longer-Term, technically healthy, bottom looks like. It's very simple. All you have to remember, or look for, is "The 4 B's and a D." (Bottom, Bounce, Base, Bottom & Divergence)

Let's take a look. Below is a daily graph of the SPX during the last bottom - March of 2003. You'll notice, at B1 (Bottom), the market put in its first reaction low while most of the momentum indicators were giving extremely oversold readings. At B2 & B3 (Bounce and Basing) the MACD crossed back over its average and the Fast Stochastic crossed the Slow Stochastic. (Positive right?) Maybe - this is where I've been talking about false-positives. Now onto B4 (Second Bottom), this bottom undercut the 1st while the momentum indicators didn't read as oversold as the first Bottom (Divergence). Another clear indication of the second bottom was the High Volume Reversal Day that took place. You may also notice how the down volume (Distribution) on the second bottom was less than the first (less sellers).

Immediately the market started to pick up speed and the MACD crossed its average for a second time while the Fast Stochastic crossed the Slow Stochastic. The RSI also showed divergence at the second bottom (greater relative strength at a lower low).

Now for the technical confirmation signals...

The first came when the SPX retested the first BO (breakout) and the 50-DMA. The second came as it busted through the ST downtrend and the 50-DMA started heading back north. Three days later it retested the Floors & Ceilings. The final confirmation was the Bowtie. This is where the 3 major moving averages (50, 150, 200) cross at the same point - extremely bullish.

WONDA Copyright 2004 William O'Neil + Co.,Inc. All rights reserved

Now let's look at today's graph of the SPX.

The ST & IT trends have been broken. The 50-DMA has started to head south for the first time since the last graph and all of the momentum indicators are at extreme readings. Bottom? You tell me.

Personally what I'd like to see is the "First" B - a reaction low.

WONDA Copyright 2004 William O'Neil + Co., Inc. All rights reserved

I just want to state a few facts before leaving you today...

The more they talk about, on the "evil-black-box," possible turning points in the market - human nature dictates - the more you'll watch. The more people that watch, the better their ratings. The better the ratings, the more money they make.

Educate yourself and you'll never have to rely on anyone else's opinion.

I hope this helps !

Until next time...

The KAT

No positions in stocks mentioned.

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