Know the Difference Between a Low and a Bottom - TheStreet

Much has been made over looking for a bottom in this market, so I thought I would explain there is a big difference between a market low and a bottom.

A low is just that: a point at which the market makes a low, or a point where the majority of stocks make their lows. A bottom is something that forms over time, creating a base from which to launch a sustainable rally. We cannot have a bottom until we have a low, and usually it takes at least two, and often several more than that, lows to form a bottom.

Below you will see a chart of the bear market from the start of this decade, 2000-2002, coupled with the number of stocks making new lows. I did not start with the highs in the market in 2000, as new lows don't tend to pick up until you are well into the decline.

What you can see is the intensity of the new lows in the days post-9/11. That is point A on the chart. That was a market low, but not THE low, just A low. We did, in fact, enjoy a rally from that point. And then we slid again until we made another low, much lower than the post-9/11 low, at point B on the chart.

You can see how intense the number of stocks making new lows was on that low, even more so than the 9/11 low. From that low, we once again rallied. That rally was relatively short and sharp, as it lasted approximately four to six weeks at most before we started falling again, to point C on the chart.

Point C actually represents the market's low for that bear cycle, but notice that it does not represent the peak reading of stocks making new lows; that is reserved for the July low, three months prior to the October low.

But even the October low wasn't enough to launch a real bottom. From that point, we once again rallied and once again sold off, culminating the decline in March of 2003, at point D. So if we do some quick math, that bottoming process began in September of 2001 and ended in March 2003, or approximately 18 months. Note I said the bottoming process, because first and foremost, it is a process, and secondly, the process doesn't begin until we see an extreme reading of stocks making new lows followed by a rally.

This past week we had our first truly extreme reading of stocks making new lows. One could argue that the readings we saw last January were our first extreme readings; I would not argue too vehemently against that. But even if January was the first peak reading and this was the second, then at best, we are in July of 2002 in terms of where we are in the bear market.

However, before we start saying this past week was the peak reading, we must get some sort of rally that lasts longer than a few hours so that we have what looks and appears to be some form of capitulation rather than just relentless selling.

Therefore, it is best to keep in mind that anyone out there who is calling for a bottom here is likely using the wrong terminology: a bottom takes time to form as it is formed via a series of lows and rallies; we haven't even had a low and a rally yet, so how can we have a bottom?

Helene Meisler writes a daily technical analysis column and Top Stocks. For more information,

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. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback;

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A bottom is generally comprised of several significant lows, forming a base for price to launch a rally.

An important part of a bottom is seeing stocks making new lows at the same time. If this doesn't happen, a bottom will not be put in.

Capitulation selling is not an option. One must have it in order to mark a bottom.