In this market everyone is looking for the market turning point. The point where investors come in and say, stocks have been crushed enough, everything is on sale, it is time to buy. But how can you tell when that time has come? Is there some magical device that will give you the exact bottom or top?
The Japanese like to think so. The candlestick patterns that were first discovered in Japan are widely used today to find the tops and bottoms. They do have success and have been tested over 400 years.
However these candlestick patterns are not the ultimate answer. They normally only give off signals for short term trends. If you were looking to catch a short spike up that last a couple of days candlestick patterns can be helpful.
But if you are looking for a longer term trend reversal that will last years it will not come so suddenly. A trend does not change overnight; the markets do not suddenly go from a downtrend to an uptrend in an instance.
What normally happens at market tops and bottoms is the market tends to trade sideways for a little while. This little while could stretch anywhere from a few months to a year. That allows investors to feel like the stocks have stabilized and stop falling.
It gives everyone the feeling that the risk is gone. You can buy stocks at a big discount without having to worry about losing your shirt. Finally after months of trading sideways the markets break into new short term high and everyone starts to buy creating another bulls market.
That pattern forms time and time again when the markets start to change. Changing takes time. If you are trying to buy cheap stocks right now don’t assume that they will automatically shoot up in the next week. Some plays could take years to work out.
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