Has the market hit bottom? Bad question

In a bear market, the focus is always on one issue, namely, has the market bottomed? There has been endless debate over this issue lately, and there are compelling arguments for both sides. It is certainly a possibility that we have seen the lows, but it is a distracting question and should not be the most important question for traders and investors to consider.

The reason there is so much talk about funds is that if we are comfortable identifying one when it has occurred, then we can put our capital to work without worry. We just need to make that decision, then the pressure and indecision is lifted, and we can just wait for our stocks to rise.

The problem with this approach is that it makes investing lazy and unruly. We start to believe that the market will bail us out if we make a mistake and we tend to inaction because we are convinced that a bottom in the market will protect us from big losses. We are rushing to put capital to work so that we are not left out of the glorious new uptrend and life is good.

Another problem with focusing too much on substance is that it tends to undermine objectivity. Once we make this statement, we tend to constantly search for anything that supports what we already believe. We tend to reject arguments to the contrary, and it’s much easier to make mistakes when we become less flexible in our thinking.

The allure of proclaiming that the market has bottomed out is easy to appreciate, but there are a series of more important issues to consider. Far more important than hitting a market bottom is building sustained momentum. We want to buy stocks when they have the best chance of a strong uptrend. This is why big bear market rallies generate so much excitement and optimism.

A dip is not necessarily the best entry point. Think a little about this statement. Just because a stock or market has bottomed does not mean it will produce a strong trend. Stocks often languish for many years without retesting their lows. These are not great investments even though they have already hit rock bottom.

The most important question to consider when looking at what we hope will be a market bottom is whether the charts are improving. A chart that has a bottom is not necessarily a good chart. It takes time for a solid chart to develop. The real power of map development is that if we are patient and wait for clear support to build, it makes risk management much easier. We have very clear stop levels and new entry points are less risky when the price action develops in the right way.

Rather than asking if the market has bottomed, focus on finding charts that have developed support levels and are beginning to produce a series of higher highs and lower lows. When you find charts like this, you don’t have to worry about whether the market has bottomed out. Stop and support levels will be clear. All you have to do is manage your trades. There is no need to engage in the debate about whether a rebound is also a market bottom.

The current market has quite a few people convinced that we have seen a bottom for this cycle. I really do not know. What I’m focusing on is finding charts that develop strong support and provide clear stop levels if this current move turns into another failed bear market bounce.

So instead of asking if this is a market bottom, focus on buying good charts and having a clear exit plan as market conditions change.

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