How To Find Bottoms
A lot of traders will claim – “Don’t try to buy the bottom.” But I’m wired different. I look for strategic places where and and when a tradeable bottom can form. There a couple of indicators that I use to narrow in on the when.
The McCellan Oscillator
The McCellan Oscillator is a breadth indicator that measures the differences between advancing and declining issues.
I find it useful for finding those extreme ratios that lead to quick and aggressive bounces like we saw this week. On my Tc200 charting platform, the McCellan is the “t2106” Extreme readings are below -130. There’s a lot of pain in the market when that occurs. The verticle lines on the chart are where that reading hit. I have the QQQ and The SPX on the same chart for analysis. As you can see when the extreme ratios were hit the markets regularly will put in aggressive bounce.
When the TC2106 hits those levels, I look for relative strength. The market is getting in a situation where it will completely flush or it will bounce hard. When considering whether to put a trade on at these levels, you want to make sure that there’s not some impending liquidity break on the horizon — like Corona Virus that will rip through every support level. These are rare and the panic and selling is more aggressive than a gradual grind down.
The Big Dip
The T2106 / McCellan is great for tradable bounces but these are not necessary THE BOTTOM. There is a different indicator that I use to trade the big bottom. The type we saw last March/ April, This indicator triggers when the market looks so bad that everyone is convinced the financial systems will completely fall apart— except they don’t.
The % of stocks above 40ma is the indicator I use for these types of events. When it gets below 15 its time to start looking for that bottom. Most stocks will look awful during these periods. I typically will buy an ETF to offset the individual stock risk. At worst, you can typically hold to a bounce to the 20MA within a few days. At best, you hit THE bottom and can hold for months.
As you can see, these Sub 15 readings are very rare. You will only get one every couple of years. Conversely +90% ratios can be viewed in a couple of ways. The first reading after a drop is very common. Stocks have been beaten down and a bounces that brings everything back up will hit that “Extreme” level on the upside. That is not a sell signal. It’s far more concerning if the market has been rallying for a bit and then hits that level.– see 2016. That tells us there may not be many buyers left.