A market bottom can bring punishing drops in prices, heavy trading volume and a large number of stocks that hit new lows. The cathartic sell-off is like a brush fire that drives many investors from the market but clears room for a recovery.
"Bear markets don't end in whimper. They usually end with a crash," Stovall said.
There are two classic types of bottoms, Stovall says. The first is a double bottom, where stocks fall, rise and retest the lows before ultimately moving higher.
There is also a triple bottom, which is like an inverted head and shoulders. There is a low, which is one shoulder. Then stocks fall even farther on the second low — the head. Then, after a partial recovery stocks fall again but not as far as the middle decline. Investor confidence builds as stocks avoid returning to their lowest levels.
History shows that the rallies coming out of a bear market are far stronger than most advances.
In bear markets since 1932, the S&P has gained an average of 46 percent in the 12 months after stocks hit bottom. The gains range from 21 percent to an incredible 121 percent.. Source.
