Are you looking for a market bottom? From my perspective, it doesn’t matter. I don’t search for bottoms – or tops – because it’s pretty much a loser’s game. If that’s what you focus on, you can quickly get caught up in a fear mindset and miss great trade opportunities.
Instead, look for patterns that indicate a stock is on the move (up or down). That’s what matters, and it’s what we technicians do. A confluence of indicators all pointing in the same direction is the best way to find high-probability trades.
Instead of looking for a market bottom, study indicators
I am currently looking at a variety of indicators to guide my trading.
With the markets in turmoil, the VIX is in an uptrend, and moving averages are pointing up. The put/call ratio shows that traders are buying puts as protection, often at the wrong moment, making it a good contrarian indicator.
I’m also watching the high/low indicator, which shows longer term breadth trends (what stocks are hitting new 52-week highs and lows). I look for deeply negative or highly positive readings. This indicator started to roll over into negative territory back in September, giving us a good glimpse of sentiment early on.
The TRIN, or Arms Index, is another sentiment indicator that shows panic on the volume side. Levels around 2 in this indicator show oversold readings. If the 10-day ma hits 1.50 or higher, a very powerful bounce often results. This is another good contrarian tool.
Finally, any day that experiences a 90% reduction in volume is a good indicator of a washout low. You can expect a quick turnaround move upward. That happened two weeks ago on October 16, and for one day, the markets rallied sharply.
Remember, there is no sense in searching for a market bottom. Watch the indicators, so when things start turning around you don’t miss any opportunities.
