Don't trust V-bottoms


We finally managed to have two positive back-to-back days for the benchmarks. There are many stocks that bounced from oversold levels, undeservingly so. They climbed to their 50-day MA, where they will find major resistance. Why? Because most of the investors in these stocks are under water and they will sell as the stock climbs, effectively killing its upside potential. Look for V-shaped bottoms. They are destined to fail. They represent an important occurrence in trading: there is often a significant short squeeze before next major leg down. A real, healthy bottom takes time to form. It takes months of sideways action in a relatively tight range. This is an indication of accumulation. Take a look at the fertilizer producer MOS. Between October and February it mostly moved in the 30-40 range. Since January, it gradually started to build higher lows until it decisively broke  above the $40 level. Every retracement was met with support at the 50-day MA. This is a healthy formation. I do not imply that this was the ultimate bottom for MOS. In this market, anything is possible. Just pointing out, how a sound bottom is usually formed.



Don’t rush all in after two positive days. We are still in a bear market and most likely things are going to get worse, before they get any better. How long is this rally going to continue is anyone’s guess. I’d say it has the potential to go until the beginning of next earnings’ season, when we’ll hit the hard, cold reality again. In the meantime, you could grow your portfolio by being extremely selective and patiently wait for the right set ups to form. You don’t have to trade every day to be profitable.