How You’ll Know When A Tradable Bottom Is In Place

The talk for weeks now has been about this market and how oversold it is.  Everybody is looking for a bottom.  Let me rephrase that…everybody is looking for a tradable bottom. One has yet to arrive.

Will it come tomorrow?  Next week?  A month from now?  I don’t know Babs, but I do know this; it’s the wrong question to be asking anyway.  It’s not “when” will the bottom come that you should be asking yourself, but “how will I know it?” when it does come.

The short answer is “you won’t,” at least not with any quantifiable tool or indicator.  This is one of those times in trading when you can take your MACD’s, and oscillators, and overbought/oversold indicators and put them in a box with your bell bottom pants and Members Only jacket, because that is how out of touch and useless they will be.

The reason for this is because price action is not normative during the bottoming process, and thus (temporarily) changes the mechanics of a market, which skews most indicators. Oversold indicators can stay oversold for a long, long time.  Price can extend a long way away from moving averages.  Double bottoms, support levels, and other price regulators become irrelevant.

The only way you can recognize a market bottom when it’s happening in real-time is to feel it.

I know, can you believe that I actually just said that?  Mister “risk/reward ratio” guy.  Sir “quantify your trading” man. Mademoiselle “pretty boy”…wait, strike that last one.

But it’s true.  Take a look at this chart of the $COMPQ from yesterday and the tweets I made regarding finding a bottom.


Neither of those tweets were particularly heroic, nor were they really actionable.  But I did get a number of emails asking me what I was looking at in order to say what I did, when I did.

The best reply I could come up with was, “that was the way the market felt at the time.”  It sounds weak I know, but finding the actual bottom is not a quantifiable process in real-time, which is why it makes it one of the most dangerous times to be trading.

Feel is something that can’t be taught, it has to be learned, and not everybody learns it the same way.  It’s intangible.  It’s ethereal.  It’s The Jimi Hendrix Experience.  It’s taking a jazz drummer who plays behind the beat, combining that with a rock guitarist who plays ahead of the beat, and throwing in a first time bass player who plays right on the beat, and having it come out sounding like magic.

So in that context, I can tell you a few subjective things that I have found over the years that tell me when a bottom is near:

  • The streams and media will go from “we’re near a bottom” to “we will never find a bottom.”
  • Certain perma-bulls will go bearish, and certain perma-bears will crow that they are shorter than they have ever been.
  • Morning drive time DJ’s will spend the first 15 minutes of each show talking about the market.
  • Rumors of forced liquidations, margin calls, and heavy redemptions in big hedge funds will start circulating.
  • Lawmakers will start grandstanding, acting as if anything they can do will stop the market decline.
  • You will see a ton of “oh my God, look at (insert well-loved stock here)” tweets.  Think $AAPL.

There are also two relatively more objective things I look for when determining the actual real-time market bottom.

It’s almost impossible to hit a bottom without a massive price/volume spike down on a 5-min chart.  Some call this a “flush” but I like to call it a “puke” because people are literally “puking” out their positions, causing this market action.  Watch for it.

But the real nail in coffin for me is price action that makes all my charts “jump.”  Meaning that long red bar in the hard right hand bottom that moves so fast it re-scales all your charts simultaneously.  They literally seem to be “jumping” towards the bottom of your monitors. It’s hard to articulate, but it’s kinda in the vein of what Supreme Court Justice Potter Stewart said to describe his threshold test for pornography, “you’ll know it when you see it.”

If you keep these factors in mind and spend enough hours looking at the markets, anybody should be able to develop their own “feel” and have a reasonable chance of being able to tell when a tradable bottom is in place.

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9 Responses

  1. Pingback: Bottom

  2. It’s almost impossible to hit a bottom without a massive price/volume spike down on a 5-min chart.  Some call this a “flush” but I like to call it a “puke” because people are literally “puking” out their positions, causing this market action.  Watch for it.

    — that’s what I like to look for. Great article!

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  8. Hi Brian,

    Funny though, 2-3 days ago Bloomberg kept saying on the screen that Gold is losing value and all the other terrible bearish news around it. That was my buy signal which is still paying. :)

    Have nice day.

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