Lessons from the 2011 Market Top and Bottom

Note:  This lesson is meant to help you learn from the market and does not serve as investment advice for any specific group or individual.  For more information, please read the HSR Terms of Use.

2011 Market Bottom

The market bottomed on October 4, 2011 after undercutting its August 9th low on October 3, 2011 (see chart 2, page 4).

The October 2011 move lower brings up two (2) important points that often define market bottoms:

A retest of a low is common price behavior that occurs when a market bottoms.

Retests can play out in three (3) different ways:

• Higher low (The second low is higher than the first low)
• Same or equal low (The second low is the same as the first low)
• Lower low (The second low is lower than the first low)

In 2011, the October retest occurred on lower volume than the August nadir as price made a lower low.

A low volume retest (October 2011) of a high volume low (August 2011) may unfold as an index and/or stock bottoms.

All three lows can lead to higher prices, but lower lows shake out investors (sell stock) and get many to bet against the market (go short/sell stock).

This results in a sharp move higher if price fails to continue lower because shorts have to cover (buy back) their bearish positions and others simply buy stock to get into a rebounding market.

2.  Markets Fool the Majority

After a fast move down, the next move lower following a rally/consolidation is often a head fake because the market already moved rapidly lower.  When it becomes obvious to most, the market changes its direction.

In 2011, the October low was a false move lower after the quick drop in late July-early August 2011. 

The news was negative and many were looking to short stocks in October 2011, but the market had enough and was ready to rally.

Additionally, historical market bottoms (S&P 500) are common in the month of October ('66, '74, '87, '90, '98, '99 and '02).

The 2011 Market leaves behind many important lessons.

Let's recap three (3) that we can apply to future markets:

1.  Markets tend to correct after sharp moves higher

This may take place because most investors are finally aware of the market's potential. 

The market often draws in new money before correcting in earnest (a new high after a correction helps).

After a move becomes obvious, it's sometimes more difficult to make meaningful gains until the market resets (corrects) and shakes out investors.

2.  Markets often retest a low before bottoming

If the retest of a high volume low occurs on lower volume, it's a positive indicator.

3.  Fast moves down can get many people on the wrong side of the market after the fact

This is similar to the first lesson, but it differs because moves lower happen much faster than moves higher.  This fact can quickly get investors very bearish/negative, but markets do go up more than they go down.

Note:  This lesson only covered the S&P 500.  In addition to the S&P 500 analysis, there was other technical evidence that supported the 2011 Market Top and Bottom, but it's not covered in this lesson.

As a research consultant, I used the analysis in this lesson as part of my research before the 2011 Market Top.

Please >>CLICK HERE<< to view the historical charts for the S&P 500 from the 2011 Market Cycle.