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Posted on 8 August 2011 | 6,982 views

Picking a Market Bottom During the August 2011 Stock Market Crash

Most stock market declines rarely end with days like Thursday’s (August 4, 2011) 513 point drop for the Dow Jones Industrial Average.

If your an investor who thinks that we’re just suffering just a correction within an ongoing bull market, you still should prepare yourself for lower prices in coming sessions.

If you analyze past bear market bottoms — days on which those “Bear Markets” actually met their final lows — you will find those days were rather uneventful and nothing like what we saw on last Thursday.

Consider March 9, 2009, the day of the closing low of the 2007-2009 bear market, arguably the worst one since the Great Depression. Even though there were many days during that bear market that witnessed panic selling, the day of the final low experienced a drop of just 79.89 points.

It was more than three months earlier than then that the Dow Jones Industrial Average (Ticker Symbol: DJIA) experienced a panic-induced decline that was as bad as Thursday’s. That day was Nov. 20, 2008, the day when — not coincidentally, the CBOE’s “Volatility Index” (Ticker Symbol: VIX) spiked to its all-time closing high near 81.

Numerous traders keep making the same mistake which is thinking that panic selling signals a low — usually they are three-and-a-half months early.

Consider the Crash of 1987, which is the granddaddy of selling panics in U.S. stock market history. On that day, October 19, 1987 the Dow dropped 22.6%. And even though the Dow bounced back impressively over the two trading sessions following that Crash — gaining 5.9% on October 20, 1987 and another 10.1% on October 21, 1987 — the stock market’s post-Crash low wasn’t registered until December 4, 1987 — more than six weeks later.

Chances are that the final low of the decline we’re experiencing will not be recognized as such until well after the fact. It’s most unlikely that, on that day itself, so many traders will be doing what they did on Thursday — falling over themselves announcing that the bottom has been seen.

An old Wall Street saying has it that they don’t “ring a bell” at market bottoms. It would appear that this saying contains a lot of wisdom.

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