Playing the bottom

Bottom formations are complex. They rarely v-bottom. The chart below looks at the 1929, 2001, and 2008 crashes.

Starting from left to right (apologies for the missing date bar)- chart from stockcharts.com

In 1929, we saw a bust, then a huge rally, then a multi-month decline. Trading out on the rally would have made sense, then rebuying on the bust of the downtrend from that peak.

In 2000-2001 we had a selloff, followed by a rally in early 2001, then 9-11 sent it lower. Selling on that early rally would have made sense, although much harder to time. The market made a lower low as 9-11 unfolded.

For the 2008/9 crash, it fell hard, then had a rally, then a minor pullback. Buy off the bottom and then holding would have not been so bad as compared to 1929 and 2001.

So…which is it going to be? Sell on the rally, or just stay in or buy now and hold on tight?

I’m inclined to do some rotation out of stocks and sectors we dont like as this rally gets back to a point where momentum indicators normalize from oversold. If markets want to keep going as in 2009, then we can just buy on the way up, missing out on a few %, concentrating on the sectors and stocks we want into. For example, out of energy, into internet technology and dividend stocks with stable cash flow.

If we see momentum roll over, we hold off on buying and look for a buy signal. Either way makes sense. Below is a chart with the two indicators worthy of watching for these strategies…RSI and stochastics. It’s a weekly chart, with stochastics in the first pane under the price chart, and RSI the next one down. Note the nice bullish hooks. Anything over the 50-line for those indicators will be the time to start watching like a hawk. A roll over can occur any time from there. For now, I’m less focused on longer indicators like MACD. For now, anyway.

 

13 Comments

  • Hi Keith,
    Thanks for the post.
    So, do you wait to see the hooks of RSI and stochastics reach 50 level as a safe confirmation to buy?
    At what level of the S+P 500 will you consider as the resistance of the recent spike (38% of the total down side)? At what level of the index will you call a roll over has occurred? Thanks a lot. Be well.

    Reply
    • We are coming into a first level of resistance at 2600. If that is broken, it will go somewhere near 2800. Huge resistnace at 3000-3100. As far as buying, one can step in a bit at a time methinks starting now. Cautiously, though, as it could reverse again in a blink of bad news.

      Reply
      • Hey Keith,

        I’ve been a follower of your blog for quite awhile, so thank you for doing what you do. With that said, how can markets have a sustained pump when people are getting laid off at insane levels? Clearly our economy is shriveling up to the size of a dried up prune until COVID-19 infections die down or what do you think?

        Reply
        • I’m just about to post a new blog that might help with that question

          Reply
  • Hi Keith.. Thanks again for your continuing commentary. I find it hard fundamentally to see a V bottom. There is so much bad news probably still to come. From what I have read Americans just don’t take this seriously enough and don’t like to be told what to do… ie staying home and distancing. New York state for now is the most affected and is finally waking up to it. Trump is still in la-la land thinking its soon back to semi normal. A final wash-0ut event… a lot more shutdowns, immense numbers of deaths everywhere so nobody can take the business as usual thinking who knows?? I hate to think it will get to Italy’s situation in US.
    Personally, I could not ignore this incredible 2 day rally. I had covered calls expire last Friday and yesterday and today reset the three positions. Premiums are very high so couldn’t resist. So I have partially sold into the rally by covered calls and now will wait til next month’s expiries.

    Reply
  • HI Keith: Could you comment on Jason Goepfert’s suggestion today that the washout is done? Thanks

    Reply
    • I think he is likely right, but bottoms are complex, so there will very likely be a pullback after the current rally. This, even if it does or does not return to the monday low
      We are being cautious, but staying in until momentum rounds over on the daily

      Reply
  • I sense were past the maximum freakout over this virus. People are now actually looking at the numbers below the shock value headlines the media loves to print and are slowly realizing while not completely under control, fatality numbers are well below the flu numbers that occur every year.

    That said I don’t the market taking out the highs before this started for some tome. Probably just sideways range for now

    Reply
  • Hi Dave, is the market showing signs of a Bear Market Rally.? is this a potential reflexive bounce..
    “bear markets” are not resolved in a single month. Currently, there are too many investors trying to figure out where “the bottom” is, so they can “buy” it.

    Reply
  • What’s that old saying again – don’t fight the Fed? I hope it does pull back though as I’d like to keep buying in at lower prices.

    Reply
  • Hi Keith,

    The SPY and the QQQ are forming bullish weekly engulfing candles. Do you put much weighting into something like this?

    Thanks, to the Rockstar of TA
    Parm

    Reply
    • It all matters
      This coming week with earnings strating will matter too

      Reply

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