Is A Potential Bottom Forming?

May 26, 2022
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I am continually asking, “Have we found a bottom yet?”

Within the context of a well-defined downtrend, the sequence for a “bottom” to develop--whether a short-term (trading) or longer-term (non-trading)--is usually, but not always, similar. Let me first note that a low is a function of price only. A “bottom” is a function of price and time and usually consists of the following four steps.

  1. Oversold (trading below true value or previous prices)i: It is getting old when discussing oversold conditions as we have been oversold daily for a while.
  2. Rebound (the stock market moves in a positive direction after a decline)ii: Short-term (trading); we experienced a rebound defined by the equity market indices’ intra-day high from May 17. We were still waiting for this to kick in.
  3. Retest (stock price returning to its support price)iii: Short-term, this occurred last Friday in the form of an undercut low or a higher low.
  4. A true “V” bottom straight down and straight up: This occurred in 2021’s 4th Quarter decline which ended in late December. However, that was during a period when the Fed was able to act as a protective backstop. Currently, that isn’t the case. Therefore, a “V” bottom is a low probability event.

You can see why it is essential to adjust your risk in your portfolio. We can help with that, so please contact us if you want a portfolio review.

 

i Cory Mitchell, “Oversold,” Investopedia, accessed at https://www.investopedia.com/terms/o/oversold.asp on 5/26/2022

ii Robinhood Learn, “What is a Rebound?” Robinhood, accessed at https://learn.robinhood.com/articles/28JvkI00Da7PaNDmel6d5e/what-is-a-rebound/ on 5/26/2022

iii James Chen, “The Anatomy of Trading Breakouts,” Investopedia, accessed at https://www.investopedia.com/articles/trading/08/trading-breakouts.asp on 5/26/2022