Question

The next asset market that will have a bubble is the stock market.

Thanks, Chace. This is a really important point, as I suspect that many of you do not have a lot of market experience. The S&P 500 (aka "the stock market") dropped from about 3450 two 2200 or so in a matter of a couple of weeks (basically March 1-20), and has since staged a monster rebound.

I have some questions as it relates to bubbles and market timing:

1) What is a "V-bottom" in connection to stocks and What is a "dead-cat bounce" in the stock market, and why might the term have that name?

2) How does one tell in real-time whether they are witnessing a V-bottom or a dead-cat bounce? What does this insinuate about the risk of investing in stocks?

Answer 1

1. The V bottom will occur most often in a downward trend and will generally offer a signal trend reversal.

A V-bottom is not unusual for individual stocks. V bottoms often happened to companies with small cap and low volatility.V pattern is named so because the candlesticks appear to be forming a V like Shape.

A dead cat bounce is a small, brief recovery in the price of a declining stock.

It refers to the belief that "even a dead cat will bounce if it falls from a great height".

2.

V bottom patterns form when price creates the V shape at a support level. Price falls sharply then reverses. and the breakout occurs when resistance is broken. The resistance level is the top of each side of the pattern.

A dead cat bounce is a short-term recovery in a downtrend that does not indicate a reversal of the downward trend.

Both these patterns teach us that You must have the skill to be able to identify real bottoms and to take proper actions and also we should keep Booking profits as trend may reverse anytime.