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Observe How The Crowd Behaves Amid Market Turn

Fourth In A Series Crowds can be powerful forces for action and forecasting. As seen in nature, they can also have problems with inertia.

A crowd in motion tends to stay in motion; a crowd at rest tends to remain at rest. There may be no better example than the stock market.

A market that is in a downtrend or flattening into a possible bottom is a market at rest. Savvy buyers in the institutional money-management world are on the sidelines. Sellers are being shaken out at a slowing rate. The disheartened, gloomy mood feeds on itself.

Sooner or later, professional buyers will step in and begin grabbing up shares of targeted stocks. A follow-through session will occur. Stocks will rise and form a constellation of breakouts; the market will revert to an uptrend.

Is there any way to know when that change is about to happen

The answer: Not really. The best strategy is to watch for and be ready for a follow-through day.

But there are indicators that suggest pending shifts in the market's mood. Called , these are imperfect tools, as they can come in and out of favor. But they can often foreshadow a major market bottom.

The NYSE Short Interest Ratio (today on B6). This shows the NYSE's monthly total short interest vs. the average daily . The result shows how many days of average trade it would take to cover all the shorts.

A five-year high would indicate that traders are very bearish. Contrarians say this means the market is about to rise. When the ratio is at a five-year low, it says traders are bullish, which means the market might top.

Bulls vs. Bears weekly survey (today on B9). This measures sentiment among newsletter writers and advisers. In recent years, it's proved more useful as a signal that a bottom is near when bearish advisers exceed bulls, as was the case in March 2009.

Put-Call Volume Ratio (on B6). If it rises above 1.20 during a market correction, it signals a spike in fear. When the ratio surged to 1.4 in mid-May, signifying 140 bearish puts traded for every 100 bullish calls, the market was in the thick of its slide. The high level of bearish sentiment hinted a bottom was near.