A breadth classifier for V-bottoms and W-bottoms

The cycle window

The archive defined a cycle as the span between successive peaks in a new-low breadth indicator and then described how each cycle low resolved on the price index. Editorial reading: treat the peak new-low reading as a classifier that assigns the current cycle low to either a single-trough template or a retest template, then write a chart hypothesis that the next swing can confirm or break.

From the start of 1978 the sample held 24 completed cycles averaging a little over 120 trading days, or about 24 weeks. Editorial reading: that interval is the dominant cycle, used as the sampling window for classifying the next bottom.

From 1978 onward, daily new highs and new lows were counted on a trailing 52-week basis. The calculations used only that post-1978 window and an industrial stock-price average as the price index. Market breadth in this workflow is participation measured by how many issues print new lows, and highs, during a decline, used as a signal input rather than as a price-only reading.

Two bottom templates

Cycle lows were described as resolving in two chart templates. A V-bottom is a cycle low in which the price index falls to one trough and then turns higher without a later retest of that trough. A W-bottom is a cycle low in which the price index troughs, retraces part of the decline, then falls back to retest the prior low at least once. The archive noted that a W-shaped structure can retest the first low more than once. Those two templates describe a completed cycle low that prints either one trough or a later retest of that trough, including multiple retests.

A maximum daily new-low count below about 250 was associated with a V-shaped bottom, and a count above 250 was associated with a W-shaped bottom. That threshold is the new-low cutoff used to separate single-trough bottoms from retest bottoms.

Illustrated declines

One illustrated decline printed 29 new lows on 16 August 1988 and completed a V-shaped low on 23 August 1988. Another illustrated decline printed 711 new lows and was presented as a W-shaped bottom in which the lowest price was retested at least once.

In both illustrated cases the new-low indicator was an exponential moving average of each day's new-low total, using a 0.1 smoothing constant.

The retest band

Among tabulated retest cases, the later low more often than not fell within 2 percent of the prior low. In two of eight cases it printed 3.28 percent and 4.8 percent below that prior low. That closeness is the retest band: how close a later trough prints to the first low, often inside 2 percent and occasionally several percent below.

The tabulated W-bottom sample recorded, for each first downleg, the first-low date, the maximum new lows on that leg, the retest date, the days between bottoms, and the percentage retrace off the old low before the final decline.