3 Proven Ways to Know When Stocks may be Forming a Significant Bottom

Enjoy this post? Share the love.

Chad Shoop stock market bottom
Source: moneyandmarkets.com

With increasing stock market volatility at high levels lately, it is quite risky to blindly pick a market bottom. Here are 3 top technical signals to help you reliably know when it may be the right time to start buying stocks again.

Patiently Waiting For A Significant Market Bottom

The Morpheus swing trading strategy is focused on catching explosive moves in growth stocks that can run 30-50% (sometimes much more) in a few weeks to months.

This momentum-based trading system is quite profitable when the major indices are in a steady uptrend, enabling Wagner Daily subscribers to score consistent profits from swing trading stocks.

Even more impressive for many traders is that the Morpheus trading system quickly turns defensive when the Nasdaq and S&P 500 break their uptrends and reverse lower.

When that happens, our market timing model automatically prompts us to sell most (or all) long positions and shift fully to cash (as we have recently done).

Since 2002, this simple and effective trading methodology has enabled thousands of subscribers to retain their profits and avert massive losses when market conditions suddenly turn ugly.

With stocks still showing major weakness in the midst of a market correction, the Wagner Daily model portfolio is currently 100% in cash.

Nevertheless, we are now closely monitoring for key signs that the next bull market may be approaching.

Continue reading to discover three of the most powerful and reliable market signals that will help you determine when it’s the right time to get back into the stock market again.

3 Top Signals to Identify a Potential Market Bottom

3 signals

1. Wait for a major leading index to close and hold above its 20-day exponential moving average

Sitting patiently on the sidelines with a full cash position is definitely a winning strategy in a bearish market.

However, astute traders are constantly on the lookout for key signals that a bottom may be forming.

One of the first bullish signs is for the Nasdaq Composite or S&P 500 Index to reclaim support of its 20-day exponential moving averages–and close above that key level for a few days in a row.

The 20-day EMA should also begin to turn higher, around the time the index closes above the moving average.

On the daily chart of the Nasdaq Composite below, notice the index failed briefly popped above its 20-day EMA this week, but failed to hold above it:

Nasdaq daily chart
Press chart to view full-size image

Note this signal is less effective if the Nasdaq or S&P 500 moves above its 20-day EMA, but the 20-day EMA is still clearly pointing lower (it is currently sideways).

Keep an eye on this chart while doing your daily research to avoid getting caught off guard if the market suddenly reverses higher.

2. Be on the lookout for a bullish Follow-Through Day

Approximately 80% of the stock market’s daily volume is the result of institutional trading by banks, mutual funds, and hedge funds.

As such, it’s no surprise that market trends are created and led by institutional trading activity.

The Nasdaq and S&P 500 generally trend higher when stocks are under institutional accumulation, and trend lower while under distribution.

By monitoring the stock market’s total volume and price action from day to day, we can easily determine if institutions are net buying (accumulation) or selling (distribution). 

Like the popular CAN SLIM trading system, our stock trading strategy relies on the presence of an extremely reliable bullish signal known as a Follow-Through Day to let us know when it’s time to buy stocks.

Here’s how to identify a Follow-Through Day:

  1. Look for the Nasdaq or S&P 500 to form a bullish reversal pattern on its daily chart.
  2. After the bullish reversal pattern forms, wait for a day that closes at least 1.5% higher AND on higher volume than the previous day.
  3. This “follow-through day” must occur on day 4 or later of the new rally attempt (day 1 is the bullish reversal day).

No matter how much institutions try to hide their intentions, volume always tells the tale!

Volume is the footprint of institutional trading activity and one of our favorite, most reliable technical indicators.

Check out The Tried-And-True Follow-Through to learn more about Follow-Through Days.

3. Keep track of stocks showing clear Relative Strength while market sells off

This last signal may be the most important way to know when the stock market may be forming a significant bottom:

Look for stocks that are still within 10-15% of their 52-week highs, and are (ideally) setting higher lows.

At a minimum, focus on stocks that are moving sideways while the major indices are setting lower lows.

The daily chart of $TME below is a clear example of a stock with relative strength during a market selloff:

$TME relative strength
Press chart to view full-size image

Notice how $TME began setting higher lows while the Nasdaq Composite was setting lower lows over the past month.

Then, $TME broke out above its consolidation to a new high as soon as market conditions improved and the Nasdaq tested its 20-day EMA.

The concept of Relative Strength trading is simple, yet extremely powerful:

If a stock is so strong that it goes sideways to higher while the broad market is trending lower, it will typically be the first stock to rocket to new highs when the market eventually reverses higher.

Stocks with relative strength are also typically the last to fall if the major indices keep trending lower.

Buying stocks with relative strength to the broad market is an effective way to simultaneously lower your overall risk and maximize your profits.

Start building your Relative Strength Watchlist now, then look for stocks that show bullish price and volume action AFTER a major index convincingly reclaims its 20-day exponential moving average.

Sign up now for our nightly swing trading report to automatically receive our exclusive Relative Strength Watchlist–we’ve already done the hard work for you!

Proceed With Patience and Caution–Then Profit!

During a market correction, many traders will try–but ultimately fail–to catch a market bottom.

After several failed attempts, this can be psychologically taxing.

When the stock market is eventually ready to explode higher, a trader who was too active during poor market conditions may be in a bad head space when the time is right.

As such, the frustrated and mentally exhausted trader will not be able to pull the trigger when the market is ripe with new trading opportunities.

To avoid becoming a failed bottom picking hero, use these three “no-nonsense” signals in this post to help you identify when the odds of a significant market bottom are in your favor.

Finally, note that having all three of these bullish signals is a good start, but certainly does not guarantee that a bear market will turn into a bull.

To be alerted to the next crucial signals that may lead to the next bull market, sign up now for The Wagner Daily, the best stock picking newsletter in continuous publication since 2002!

Enjoy this post? Share the love.

4 comments on “3 Proven Ways to Know When Stocks may be Forming a Significant Bottom

  1. The formula for calculating an EMA forces the EMA to always be rising if the index is above it or falling if it is below. The 20-day EMA cannot be pointing lower if the index is above it.

Please leave your comment below!

Your email address will not be published. Required fields are marked *