Timing Market Turns

With that out of the way, let's get to the nitty-gritty.

On Wednesday, Barton Biggs announced on CNBC that the market was "as oversold as anytime as it's been in 20 years." Whether or not that's true -- and by some measures, it's not -- is that the reason you should've been buying into the selloff? What's so magical about the 20-year mark?

Nothing. Oversold markets can always get more oversold -- just as overbought markets can get more overbought. But this doesn't mean you should merely step aside when the markets plunge. If you are a trader, you can find opportunities for fast profits. Key reversal days like last Wednesday can also offer advantageous entry points to longer-term investors.

But like all opportunities, these come with especially serious risks. Trying to catch the proverbial falling knife isn't for the faint of heart or the undisciplined.

Various Methodologies

Einstein discovered that the universe is essentially mass, space and time -- and even those are relative. Likewise, technical analysis is nothing more than price, volume and time. An entire market discipline has been derived from these three variables, and everything else is simply a variation on a theme.

On RealMoney alone, I counted no fewer than six different methodologies for buying market turns. Each uses a different measure of individual stocks or the entire market, and not one is foolproof. However, they offer quite a compelling argument that turns can be successfully timed, if you have the nerve -- and the trading discipline -- to step into the fray.

For example, Gary B. Smith tracks the T2108, which shows the percentage of NYSE common stocks above their 40-day moving average. That seems to give a fairly reliable signal some 30 days ahead of market turns.

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Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback and invites you to send it to [e-mail].