FAS Bottom Analysis

This entry illustrates a technique worth, in this case, a potential 300% in less than two weeks. The FAS bottom is a real-life example of John Bollinger's relatively higher bottom. FAS is a Financials 3X Exchange Traded Fund. Although this example uses a traded issue, the technique can be used to determine market index bottoms the day they occur with a significant probability of success.

Mar. 6, 2009: FAS declined for five days, making a new low when it made a hammer. This formation indicates a low, being a Wychoff spring, an American name for a selling climax bounce-back more commonly known as a candlestick hammer. Note the previous day had heavy volume with price significantly down, where this day had less volume, made a lower low, yet closed off that bottom. Note, too, that this tentative bottom, although lower than the previous bottom of 3.92, is relatively higher compared to the lower Bollinger band. That, too, indicates a bottom, and, if so, invokes a rule of thumb that the rebound will carry to the far, upper Bollinger band, currently at 10.83—a potential 400% profit.

Calculating a reward-risk ratio: Reward 10.83-2.64:Risk 2.64-2.32, gives a staggering 8.19:0.32 or 25:1, where one wants a minimum of 3:1. Should one take a position on the open the next trading day, one can use 2.32 as a stop loss point.

Mar. 9, 2009: FAS up slightly but on heavier volume. The heavier volume not resulting in a price decrease also indicates an exhaustion of sellers and buyers coming in. Apparently other traders have seen the potential bottom with tremendous upside potential and are buying.

Had one taken a position on the open, it would have filled at 2.53, providing an improve reward:risk ratio greater than the calculated 25:1. Marvelous. Had one not yet taken a position, one could again taken one at tomorrow's open with a stop loss set at today's low.

Mar. 10, 2009: FAS is up a significant percentage (38%) on again tremendous above-average volume. All doubt that 2.32 was a bottom, yet relatively higher than the previous 3.92 low, is gone. It’s rock-&-roll time! Note, the 20-day moving average centering the Bollinger bands (dotted line) declines toward the lower trendline, and the two should meet tomorrow.

One should move up stop loss to low of the day, 3.09, assuring one should keep some profits if FAS performs adverse to expectations.

Mar. 11, 2009: As expected price paused at the downtrend line, even though volume expanded further. Traders represent the vast majority of volume in this issue, so many expected a possible bonce off the trendline and wanted to capture their profits of the previous day—almost 100% since the 2.32 low to the high of today. For the traders still holding the next day should push through the trendline and move to moving average or even the higher trendline.

A pause day that is nicely higher is nice indeed. Move up stop loss to low of the day, 3.76, virtually assuring a nice profit indeed.

Mar. 12, 2009: Price indeed moves upward on above average but less volume than the previous day. The close averages the difference between the moving average and trendline. The next day’s price action may retest the lower trendline and/or moving average, reach the upper trendline, or both. In other words, expect another possible pause day.

Mar. 13, 2009: Price performed as expected, but volume increased, indicating buyers are positioning for another major move upwards. Note, the next obvious target will be the upper Bollinger band, here shown at 7.23, approximately 40% above the closing price of 5.15.


Mar. 16, 2009: Obviously not today, the price declines on lesser volume, indicating there are not an overwhelming number of sellers. Buyers are watching.


Mar. 17, 2009: Price up 15%, but volume is lower, again, indicating price is near its target of the upper Bollinger band, thus fewer buyers, but today’s action also indicates a minor number of sellers. Note, price did retest the moving average it heeded two days before.

Mar. 18, 2009: Price up 27% achieving the targeted upper Bollinger band, on heavier volume. Tomorrow should expect some profit taking from those who have held this issue from near the 2.32 low to the upper Bollinger anticipation. The 7.80 high is approximately 300% above the 2.32 low.

Bring stop loss up to low of the day, 5.37. Had one wanted, one could have placed a sell order at the target price (7.16), or simply sell at tomorrow's open since one has made target. Tomorrow's open turned out to be 7.75. Nice profit either way, or one could just wait for the stop to take out the position, hoping FAS will walk the upper Bollinger band.

From here one may wish to review FAS Review, the entry of the pattern after price reached the upper Bollinger band. From the various FAS entries, one perceives the tremendous value of Bollinger bands. There are many entries on the web addressing Bollinger bands, but the best method to master them is from the book by the master himself, Bollinger on Bollinger Bands. It is one of the few books I recommend for those wishing to make a lucrative living trading. Bollinger's identification of "relative higher bottoms," as shown here, indicates the tremendous value of this technique. One trade should pay for the modest price of this book.