This is what a stock market bottom looks like.

The picture being painted is a short-term bounce. But will it hold?

If there is one chart I need you to see, it’s the one below. Last week we saw a “bull trap” in the form of an intraweek reversal: price rallied, then violently and quickly sold off.

As we approach major support levels, at home investors are very bearish, meaning now is a good time to look for buys.

But what’s the technical picture saying?

Identifying Market Bottoms

There are many tools you can use to spot reversals. I pay close attention to the Put/Call Ratio and A/D Line as warning signals, and Candlesticks as entries (preferably, at Bollinger extremes).

Let’s break this chart down, from the top down.

1. The Put/Call ratio skyrocketed, indicating that equity investors are very, very bearish. Remember - a big part of my strategy is fading the public, because the herd mentality is always wrong in the end.

2. Price is trading at Bollinger Extremes, meaning a reversion back to the average (around 4,482) is highly likely.

3. FWIW, I don’t pattern trade, but the Inverse Head & Shoulders is a very, very powerful bullish set-up. I have trader friends who swear by it, and I’ve had multiple successful trades with it.

Side note - a big part of trading is seeing what other traders see. Just because I don’t trade the H&S, if I see it, I know other traders see it, strengthening my usual “signals”.

4. Price is approaching MAJOR support I detailed in my February 17th post. If there is a breakdown below this support, watch out - however, look for a candlestick reversal at the 4,100ish level.

5. NYSE A/D Line, which measures the # of stocks that are up vs. down, fell to below -2200. This indicates a level where the market literally runs out of bears.

6. Finally, not indicated on this chart, the Volatility Index (VIX) is trading outside Bollinger. Study this powerful chart to help with reversals.

When do you buy? Wait for the candlesticks.

Everything laid out above is a technical “picture”. Price is painting a picture that looks like a reversal; but you need candlestick reversals to trigger your entry…

Buyer Beware: Fed Raising Rates

I’m actually a little concerned about the major reading on the Put/Call Ratio. Generally, this indicates that the market is overly bearish and due for a reversal; but the market has good reason to be overly bearish.

Last week, the Fed announced they will “expeditiously” raise interest rates. Rising rates at an “expeditious” rate, historically, has caused recessions. Not to mention, as we approach the major support levels, prior “support” can become future “resistance” if we break down. This is a concept called Polarity I plan to expound upon in the coming weeks.

Final Thoughts

Wait for a candlestick reversal before entering any trades.

Don’t be surprised if a news event - good or bad - coincides with the candlestick. This happens all the time.

Any candlestick reversal we do see should be accompanied by a reading on the A/D line around 2,000. This indicates strength in the move higher.

Fundamentally, I am concerned about the Fed and high reading on the put/call ratio.

Technically, we are due for a major bounce, as the monthly technical picture is super bullish (see first chart here), especially in a midterm election year.

Happy Trading 😊