Novice Traders’ Notebook

Cardinal Reversal Patterns — At Bottoms

4. The Descending Bottom

The descending bottom is a climactic selloff followed by an immediate price reversal. Prior to this reversal, the market will have been in a downtrend for some time. The price pattern is an indication that the bearish attitude among investors has reached an extreme level of pessimism, forcing out the last holders of shares. At this point the market has discounted the worst possible news on the horizon. Savvy traders and short-sellers, recognizing that the bearish attitude has reached levels that are not sustainable, begin to purchase shares, but then they encounter a vacuum of sellers. The upside movement is swift, as the buyers are forced to acquire positions during a dearth of floating supply and must aggressively bid higher prices to do so. Often, after the descending bottom is complete, a sustainable uptrend will take a significant amount of time to begin. It is at this point that the management of the company will need time to overcome the fundamental problems facing it.

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