As of 09/19/2019
  Indus: 27,095 -52.29 -0.2%  
  Trans: 10,504 -72.12 -0.7%  
  Utils: 860 +3.49 +0.4%  
  Nasdaq: 8,183 +5.49 +0.1%  
  S&P 500: 3,007 +0.06 +0.0%  
YTD
 +16.1%  
 +14.5%  
 +20.6%  
 +23.3%  
 +19.9%  
  Targets    Overview: 09/12/2019  
  Down arrow26,400 or 27,600 by 10/01/2019
  Down arrow10,200 or 11,100 by 10/01/2019
  Up arrow875 or 830 by 10/01/2019
  Down arrow8,000 or 8,750 by 10/01/2019
  Down arrow2,925 or 3,050 by 10/01/2019
As of 09/19/2019
  Indus: 27,095 -52.29 -0.2%  
  Trans: 10,504 -72.12 -0.7%  
  Utils: 860 +3.49 +0.4%  
  Nasdaq: 8,183 +5.49 +0.1%  
  S&P 500: 3,007 +0.06 +0.0%  
YTD
 +16.1%  
 +14.5%  
 +20.6%  
 +23.3%  
 +19.9%  
  Targets    Overview: 09/12/2019  
  Down arrow26,400 or 27,600 by 10/01/2019
  Down arrow10,200 or 11,100 by 10/01/2019
  Up arrow875 or 830 by 10/01/2019
  Down arrow8,000 or 8,750 by 10/01/2019
  Down arrow2,925 or 3,050 by 10/01/2019

Bulkowski's Finding Market Bottoms

 

1-2-3 Trend Change

1-2-3 trend change method for downward trends

The first method is what I call the 1-2-3 trend change method, created by Victor Sperandeo and discussed in his book, Trader Vic: Methods of a Wall Street Master. You can refer to my link for the details for both up and down trends, but the gist of it goes like this...

Draw a trendline from the highest high (Point C in the figure) to the lowest low (A) on the chart such that price does not cross the trendline until after the lowest low (point 1), then follow these steps.

In a study I conducted of this method, 73% of the time (74 of 101 samples) price climbed at least 20% from the low, confirming a trend change. In other words, the method detected a bottom. As with any technique, it is not foolproof because fools are so inventive. Here are additional tips.

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A Higher Bottom

Ugly double bottom chart pattern

A market bottom can come in a variety of shapes. There is the V-shaped recovery that appeared in the 1929 crash, but the market continued lower after April 1930, and the events of 9-11 also progressed as a V-shaped recovery. The bear market of 2000 to 2002 ended in a complex bottom that took the shape of a head-and-shoulders bottom. Then there was the crash of 1987 that formed an ugly double bottom.

In all market bottoms and whenever a stock turns, it has to make a higher bottom sooner or later. If you switch to the weekly scale and see that price is continuing to make lower lows, then you have not reached the bottom yet. Eventually, though, an ugly double bottom appears similar to the chart with point 2 above point 1. You may see it on the weekly chart or on the daily. On the monthly chart, it may look V-shaped, but even there you can often see a spike low where the higher bottom occurred. So, look for a higher bottom and some would say, a higher peak, too. If you practice the 1-2-3 trend change method, then this step is already covered. The point is, you must have a higher bottom before the market can turn from bear to bull.

CPI is Bullish

Look at the chart pattern indicator. The current market flavor of the indicator is also listed at the top of this page, in the right box, and shown as CPI. If the signal is bullish does that mean a market bottom? No. Wait a week (and the charts in the associated link are updated weekly, the above box is updated daily). If the signal is still bullish a week later, then the chances improve that this is a bottom. The bottom might not last long, but it is an indication that a minor low has formed and it may become a major low.

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Chart Patterns

In the FAQ, I answered a question about the S&P bottoming. I said that on the way down, bullish chart patterns disappear. For example, you do not see a double bottom confirming (price rising above the peak between the two bottoms) when a stock continues making new lows. When the market bottoms, bullish chart patterns appear, but that is not the time to buy. Those patterns will have upward breakouts, sure, but many will fail soon after when price reverses (heads back down). The market has not begun trending, and it is a dangerous time to trade. Bad news pushes the market lower, almost daily.

Eventually, price will level out. You will see many basing patterns, such as rectangles. Bad news that used to drive the market down by hundreds of points in a single day hardly budges it now. You will see many bullish chart patterns forming, as if individual issues are just begging to move higher, but there is still some hesitation. Those chart patterns with upward breakouts will have price continuing to rise in a nervous stair step move. Before, one low followed another, but now, price makes higher valleys and higher peaks in many securities. That is the time to buy.

Remember that the market looks ahead six months, so even though you hear bad news, the market may move up anyway, shrugging off the news and bursting upward on good news.

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Pipe Bottoms

I have noticed that when the stock market nears a major low, pipe bottoms appear like ants at a picnic. Their appearance is an indication that the market will bottom soon, but it does not mean the market will make a lasting turn. After the pipes appear, the market bounces and new pipe bottoms disappear. Then the market bottoms a second time. That second bottom is the real bottom. It marks the major turn that everyone has been expecting.

To find those pipe bottoms, you have to look through hundreds of stocks. But one day you will see pipe after pipe after pipe appearing. You may only see 20 or 30 out of 500 stocks, but it is well above the half-dozen or so you normally see. Their appearance tells you something, so listen to that voice. It says that the market has bottomed and if the pipes have confirmed, then the market has already moved up as well. At that point, you are probably a month away from the actual bottom. As I recall, the pipes do not appear in large numbers at the second bottom, only the first one.

I have not studied this to prove that it is true, so keep that in mind. Consider it anecdotal evidence of a trend that I have seen.

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Stock Downgrades

I looked at 691 stock rating downgrades using 500 stocks from mid 1991 to mid 1996 and another 500 stocks from 1999 to mid 2004 (to include the bear market, but not all stocks covered the entire range), and then sorted where the downgrades occurred within the yearly price range. I found that in a bull market between 46% and 48% appeared within a third of the yearly low. In a bear market, between 58% and 62% were within a third of the yearly low. In all cases, the number is the highest of the three ranges (that means I counted the number that appeared within the highest third, middle third, and lowest third, and those within the lowest third had the most counts).

If you see a number of brokers downgrading stocks, then you could be about a month away from the bottom (the average time to the bottom is between 24 and 26 days after a downgrade).

You Feel Like Selling Everything!

If you feel so disgusted with the performance of your stock portfolio that you begin to sell everything, then you are probably within a week or two of the bottom. Why? Because others feel the same way. And when everyone decides to sell, they make one big splash, often forcing the index down hundreds of points in a nice spike on high volume. When selling pressure eases, buying demand takes over and prices move up, leaving a bottom and a bear market behind.

The problem with this one is when you know you are close to a bottom, so you decide to hold on. Everyone else feels the same way, so no "SELL EVERYTHING NOW!" takes place, and the market does not drop 500 points in a session, but continues the daily slide. Thus, you either sell near the bottom or hold and see your losses mount. You can't win.

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High Volume Bottom

Unusually high volume at or near a price bottom can signal a market turning point. Why? Read the last item. If everyone is so upset with the performance of their stock holdings that they tell their brokers to cash them out of the market, then this type of selling signals a bottom and you will see that it occurs on high volume. The volume need not be a spike (although it often is, especially if price drops a lot) but should be unusually high surrounding a price turning point. In other words, the volume has to represent panic selling, desperation on the part of the sellers to get clear of a falling market.

Bad News Moves Nothing

Each week, economic reports come out, but some are more important than others. If the report is bad and the market either drops little or even climbs, then the market may be ready to make a sustained advance. You will want to watch the reaction of several reports, just to be sure that bad news is no longer depressing the market.

It is probably like feeling you should commit suicide. Your wife has left you. You lost your job. Then the bills come and you see one from the IRS. You may even laugh and ask if it can get any worse that this? Even the envelope from publisher's clearing house announcing "You may be a winner" gets a yawn.

Imagine if you did win the sweepstakes or lottery. You wouldn't need a job. You could pay off the IRS, and lovely women will be dripping off your arms (or so the male fantasy goes). If bad news fails to drop the market by hundreds of points, then the bottom is near.

Good News Lifts the Market

If bad news has little effect on a falling market, then good news should lift it. This is probably like closing your eyes just before a car crash only to open them and discover it didn't occur.

-- Thomas Bulkowski

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See Also

 

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My novels:      New                  Bumper's Story Head's Law

Chart Patterns: After the Buy Getting Started in Chart Patterns, Second Edition Trading Basics Fundamental Analysis and Position Trading Swing and Day Trading Visual Guide to Chart Patterns Encyclopedia of Candlestick Charts Encyclopedia of Chart Patterns 2nd Edition Trading Classic Chart Patterns

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