In Search Of The Elusive Bottom

Nov. 20, 2012 11:05 AM ET
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Contributor Since 2012

Established in 1994 by Greg Capra, well-known technical analyst and successful trader, Pristine has successfully taught thousands of people to consistently profit from the markets for over 20 years. Greg and Pristine have appeared on CNBC, Barron’s, Investors Business Daily, International Business Times and other major financial media. We provide the absolute best and most comprehensive trading courses on stocks, options, futures and forex, as well as live, hands-on trading labs. Our course seminars are taught by Greg Capra and other well-known professional traders and instructors, live online, convenient for traders all around the world. We also provide exceptional, live, online interactive courses; premier self-paced home study courses; and excellent educational videos. Special real-time daily, weekly and monthly services are also provided.

Over the years, I've seen many TV commentators, newsletter writers, self-proclaimed market gurus, chat room moderators and of course, traders call a bottom. Most of them being early on their call and/or entry are caught on the wrong side of the trend. However, they always have follow up calls to get long in hopes of catching the elusive bottom. I'll show you how elusive - it isn't.

What is baffling is, bottoms are one the easiest patterns to spot, so why not wait for it to setup? Of course that would take some trading education, which most people resist spending money on until they have lost some money - or a lot it. But how senseless is it to be calling and risking money on a reversal without any evidence of one? Don't expect this to ever change and we don't want it to. The bottoming pattern happens not only because of accumulation, it is also because of the early buyers capitulating.

Let's review some examples.

In the charts above are various tradable instruments. I chose bottoming patterns in stocks, commodities, currencies and the broader markets indices. It does not matter what you trade, this happens the same way in all tradable instruments.

As prices move lower within a downtrend they will begin to accelerate lower near its end. This is seen through multiple bars moving down with little overlap between them and/or wide range bars. At some point, the move lower will be rejected and prices will spring back up. The spring up typically is shallow and does not violate the trend by overcoming Major Resistance (MR).

What follows is a consolidation and pullback that will retest the original low. At times, the original low point of the move will be violated; however, all moves higher that initiated from the retest should have multiple bars moving higher into MR or above it and may have bullish Wide Range Bars (+WRB) as well. Pristine Tip: Multiple bars moving in one direction with little overlap between them are a Wide Range Bar in a higher time frame.

The bottoming process can go on for a relatively long period of time depending on the time frame being viewed. Longer time frames will form bottoms over a longer period of time and vice versa for shorter. That being said, the Pristine Trained Trader (PTT) knows that the odds of the bottoming pattern having high odds of making a significant move depends on the alignment of multiple time frames and where the bottom sets up. Let's look at an example of a stock that should form a bottoming pattern soon.

In the chart above, I have displayed multiple time frames of ROSS Stores (ROST). The monthly time frame is in a strong uptrend and pulling back where buyers will show up. That pullback is coming into first price support (green area), which may be hard to see to the untrained eye in this time frame.

What I have marked on the monthly as price support is the overlapping candles in the $50 dollar area. Pristine Tip: Overlapping candles in a higher time frame are a base in a lower time frame. See the base in the weekly time frame at the left. Notice the increase in volume last week as current prices neared the base of price support. That pick up in volume is exactly what we want to see when prices enter into a price support area.

The daily time frame of ROST is clearly in a downtrend and has not formed a bottom. However, Thursday's gap lower on increased volume that resulted in the formation of a Bottoming Tail (BT) is a typical exhaustion gap. This gap lower and BT could be the start of the bottoming process; time will tell. Exhaustion gaps come after a period of declining prices and signal that the last of the traders/investors hoping that prices would hold and turn higher have given up hope and are dumping their shares.

With the current correction in the broader markets ongoing, I hope this Chart of the Week will help you what to look for. There may be stocks that have shown relative strength and have started the bottoming process already. You will have to scan for them, but now you know what to look for!

Many new to trading the markets are lured into thinking that one market is a better market to trade than another. Those trying to sell you their services related to a specific market will guide you to that faulty thinking. For example, FOREX is a better or easier market to trade than individual stocks or equity e-minis.

This is completely false. Any market can be difficult at times because of uncertainty related to that market resulting in choppy price action. Or, any market can be relatively easy to trade when multiple technical concepts are in alignment.

With the right trading education - you can trade any market or stock you want with the same method.

Remember, the examples of bottoming patterns above were from Stocks, Commodities and Currencies. There is no difference. Yes, different instruments have basic foundational information related to them, but that information is not what you will trade. It's the patterns within the trends at the time that you will trade.

Please join us for this week's Pristine's Power Trading Workshops.

Happy Thanksgiving to All!

Greg Capra
President & CEO
Pristine Capital Holdings, Inc.

Sponsored by

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