Spotting a Bottom

While many things happened today, most notably this was an up day (yes those actually occur from time to time), I thought I would write a post showing a classic bottoming pattern in technical analysis. This can be seen by referring to GE (General Electric), which has been totally beaten up over the past year, mainly because it has a large financial segment. The chart below shows daily action for GE (click to enlarge):
First, let's forget about support. There is enough information to overlook that at present. Note that the chart shows GE to be VERY oversold at present. Now, focus on today's bar. It illustrates something that often occurs at bottoms: there is a large and significant lower tail (below the closing value). Even though today's close was lower than the open, the bears, who at one point were able to get price much lower than the closing price, were largely rebuffed by the bulls who were able to reverse much of the bears' negative momentum. In candlestick charting, today's bar is called a hammer, which "hammers a downtrend shut."

There is further reason to consider today's bar as significant: it occurred with extremely high volume. This is indicative of capitulation -- the "soft" money gives up and sells off, leaving only the "firmer hands" that will likely move price higher. This is an example of what I often refer to as "shaking the tree."

While today's action has all the makings of a short-term bottom for GE, there is no guarantee that it will actually be the bottom. Confirmation is required from tomorrow's price action: will tomorrow's trading move price above today's high? If so, there is reason to expect follow through. Of course, if more financial "shoes" drop, if tomorrow's initial claims data is a disaster, or if Friday's employment data are worse than the whisper number of around -850,000, all bets are off.

I suggest you follow GE for the next week or so and see how this plays out. To help you further, I have also added the chart for GE as most people look at it: closing prices only with no technical indicators. What would you conclude from this chart???