Did you hear that?
It happened around 2:00 p.m. ET yesterday. If you were anywhere in the vicinity of Northern California, then you likely heard a cacophony of cursing, pleading, and questioning.
That was me. I was simultaneously cussing out the market gods, asking them for advice, and begging them to stop the selling pressure.
And, that is how stock market bottoms are formed.
Let me explain…
I’ve been trading stocks and options for 36 years. During that time, there has been plenty of volatility. We had the crash in 1987. We had the sequel to the crash in 1994. We had the dot-com bust in 2001. We had the great financial crisis of 2008. And we often had all sorts of mini-crashes between all of those major events.
Over the years, I’ve learned that it’s usually better to be a buyer of stocks during these highly emotional events than to be a seller. But it takes a certain amount of intestinal fortitude to buy when everyone else is selling. It takes courage, a calm demeanor, and a bit of faith that the proverbial rubber band will snap back at some point.
So, when the short-term trend of the market is lower, when support levels get taken out, and when the technical indicators dip into extremely oversold territory, I try to identify three downside targets on the S&P 500 at which I’m willing to buy.
If the first target gets hit, then I’ll take a nibble. I’ll buy stocks knowing that the odds are pretty good it’ll turn out profitably over time. But, I’m careful to hold some ammunition back so I can buy at lower levels if the selling continues.
I’ll put more money to work when the second target gets hit. That’s the plan, after all – to buy stocks into extremely oversold conditions. But, I’m still just nibbling. I’m adding another one-third of a normal position – still holding some ammo back in case things get even more crazy.
If the third target gets hit, I’ll buy the final one-third of my position and I’ll wait for the rubber band to snap back.
If the market keeps falling, then I’ll throw a temper tantrum, yell at my computer screen, and curse the market gods for tormenting me.
That’s usually when the market finally hits a bottom.
You see… I started putting money to work in the market when the S&P 500 hit 2530 earlier this week. I knew I was probably early. But, the technical conditions were oversold. The market was extended far below its moving averages. Investor sentiment (a contrary indicator) was horribly bearish. So, I wanted to have some long exposure just in case the market bounced off of these overstretched conditions.
As the market fell further, I put more money to work at 2510 on the S&P.
That was my plan. 2510 was my second downside target. At that point, the S&P was far extended below its moving averages. The daily technical indicators were ridiculously oversold. And, the CBOE Volatility Index (VIX) was on the verge of generating a broad stock market buy signal.
But the market kept falling. And yesterday morning, the S&P hit my ultimate downside target of 2478. That’s where I put the final one-third of my money to work.
At that point, the S&P was trading 95 points below its 9-day exponential moving average (EMA). A 30-point spread is considered extreme. For any logical-thinking trader, buying the S&P at 2478 was an obvious trade.
But the market never makes it easy.
The market continued to fall. By 2:00 p.m. ET, the S&P 500 collapsed all the way down to 2441 –120 points below its 9-day EMA. That’s four times what is normally considered “oversold.” And I was well underwater on the positions I bought yesterday and the day before.
That’s when I started my tirade. And, that’s why I think the stock market put in an intermediate-term bottom at 2441 yesterday.
This is how intermediate-term bottoms are formed.
The market declines far below its various moving averages – where the rubber band is stretched about as far as possible to the downside. The daily technical indicators reach extremely oversold levels. Investor sentiment gets horribly pessimistic.
That’s usually about the time when logical-thinking traders step up to buy in anticipation of a bounce off of oversold conditions.
Then the market whacks the logical-thinking folks upside their heads until they succumb to the emotional pressure and surrender their positions. That action usually marks the bottom.
It sure felt like logic surrendered at 2:00 yesterday.
I can’t say for sure that the S&P bottomed yesterday at 2441. We’ll only know that well after the fact. But, yesterday’s action sure looked a lot like the action at the end of March – when the February-March correction finally ended.
All I can say for sure is that all of the conditions necessary for an intermediate-term bottom are in place. I suspect that traders who can buy today and then close their eyes for two weeks, will do quite well.
Best regards and good trading,
In today’s mailbag, a couple of Delta Report subscribers comment on market conditions…
Thank you for all of the recent updates on the blog during such volatile conditions. It has been a great help! Hope you enjoy the holidays and have a very Merry Christmas!
Thank you for your hard work. I am having a hard time finding “what to buy” on a bounce. February’s correction was the FIRST “bounce” I have witnessed, this will be number two… I love your teaching and look back at posts from other similar periods as I try to figure this out. Much gratitude for you and your family who support your work!
And a few other subscribers turn the conversation to Jeff’s Mastermind sessions…
Thanks for sharing all the wisdom of years of trading. At 67, I’m still hungry to learn… Merry Christmas to you and your family.
Definitely agree with keeping the sessions live! Love your work, your trading approach, and your personal manners!
Jeff, as a complete novice I joined Mastermind because I want to learn trading in the stock market. As I listen to your sessions and the questions that others are asking, it is clear that I have a great deal of catching up to do.
I am going through StockCharts tutorials and some of it is sinking in… That said, you are doing a great job and I find this fascinating! Thanks.
Thanks for all of your feedback, we read each and every piece. As always, send any trading questions, stories, or suggestions to [email protected].
The $22 Billion Clue
Do you see the fortune hiding in this century-old $10 bill?
It’s not obvious, but you’re looking at a new agricultural mega-industry…
Experts say it could make U.S. investors wealthy in just the next few months… if you act now. Learn what it is here.