--> 3 Proven Ways to Identify a Potential Market Bottom

3 Proven Ways to Identify a Potential Market Bottom

Source: moneyandmarkets.com

With day-to-day market volatility at incredible levels, it can be quite risky to pick a market bottom. But here are 3 top technical signals to help you reliably know when stocks may be forming a significant bottom.

Waiting for a Market Bottom

The trading system used in The Wagner Daily is focused on catching explosive moves in growth stocks that can run 30-50% or more in a few weeks to months.

This system is quite effective when trend conditions are ideal, enabling the model portfolio to generate consistent profits.

Then, when the market suddenly reverses lower, our market timing model automatically shifts to a nearly full cash position.

This rule-based system enabled our subscribers to quickly shift to cash and avoid the massive losses the stock market has recently sustained.

For more advanced traders, the newsletter also selectively picks low-risk entries to sell short a stock or major market index–especially after a short-term market bounce into resistance.

With the market still in a nasty correction, our model portfolio remains mostly in cash. However, we are now closely monitoring for signs that the next bull market may be approaching.

Below are three of the most reliable technical signals we look for to help identify when a tradeable, intermediate-term market bottom may be in place.

3 Top Signals of a Potential Market Bottom

1. Monitor the $VIX indicator to break down below its 50-day moving average

Extreme levels in the CBOE Volatility Index ($VIX) indicate that price volatility is high.

While high market volatility can be excellent for intraday traders, extreme levels in the $VIX makes it quite difficult to place reliable swing trading stops–typically 4-8% below a valid entry price.

After a significant market correction, watch for the $VIX to break down below its 50-day moving average, then continue to trend lower–setting lower highs and lower lows on the daily chart.

$VIX daily

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

In a bear market, sitting patiently on the sidelines in a full cash position (with the exception of timely shorts entries) is the best strategy–until the Nasdaq Composite or S&P 500 Index reclaims its 20-day exponential moving average and closes above it 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.

Note this signal is less effective if the major market index moves above its 20-day EMA while the 20-day EMA is still clearly pointing lower.

On the daily chart of the Nasdaq Composite below, notice the index failed to clear its 20-day EMA last week, on its first touch of this key moving average since selling off:

$Nasdaq daily

Keep an eye on this chart daily every evening when doing research so that you are not caught off guard if the market reversed higher.

3. Keep Track of Stocks Showing Relative Strength While Market Sells Off

This last signal is the most important of all:

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

At the least, look for stocks moving sideways while the major indices are setting lower lows.

After a major index convincingly reclaims its 20-day EMA, monitor this watchlist for stocks that show bullish price and volume action.

On the chart below, Ehealth ($EHTH) is a solid example of a stock that showed great relative strength to a previous market selloff:

$VIX & S&P 500

Notice how $EHTH began setting higher lows, while the S&P 500 was setting lower lows (Nov.-Dec. 2018).

Then, notice how $EHTH exploded higher after market conditions improved and the S&P 500 held its 20-day EMA.

Every night, or at least weekly, update your Relative Strength Watchlist.

For existing newsletter subscribers, our relative strength watchlist is already included in your subscription.

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 the three “no-nonsense” signals in this post to help you identify when the odds of a significant market bottom are in your favor.

For better odds of a profitable trade, you should also ensure the broad market has formed a bullish follow-through day (check our recent post, The Tried-And-True Follow-Through, to learn more).

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!

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