Nearly one year ago I discussed the essence of a bearish to bullish reversal in this post. I used a small-cap stock, Smart Balance Inc., as an example. The stock had ceased making new lows, and its major moving averages has started to smooth out. Nevertheless, I discussed the process of backing and filling that usually occurs, as those moving averages tend to criss-cross several times before they–and price-begin to smoothly torque up.
At the time, SMBL was trading at $4.99. Currently, the stock finished last week at $6.37. That is a fairly sound appreciation in eleven months time. Despite that uptick, the chart has seen extraordinarily violent shifts, easily sufficient to shake out even the most steadfast of bullish traders. Thus, the larger point is that you can expect major bearish to bullish reversals to be as turbulent as any flight over the Equator during hurricane season. Just because you have nailed the bottom does not mean that we are off to the races. You can still expect price swings and volatility to remain elevated as bears struggle to hold onto the initiative.
Applied to the current market, the same analysis holds true for the shippers and coal stocks, just to name two sectors that could easily have already printed multi-year lows. Despite that, though, bottom-picking bulls have had their convictions forcefully tested in recent weeks with the sudden and vicious drops lower.
As I wrote back then:
While printing the absolutely bottom on a chart is often a singular event, such as 666 in the S&P 500 on March 6, 2009, the process of forming a bottoming pattern and transitioning into a bull run can be a tedious one. There is bound to be a fair amount of backing and filling, along with false breakouts in either direction. Moreover, the moving averages on daily and even weekly timeframes are bound to crisscross several times, contributing to the frustration of both bears and bulls.
Recall that during the prior downtrend, bears became supremely confident in shorting the stock as it slid down the other side of the mountain, while bottom-picking bulls were slaughtered at every imaginable juncture. Hence, while the sellers have now run out of ammunition, and the buyers are starting to become relevant again, the embedded psychology of alpha bears and beta bulls causes laughable indecision in the price action.