Imagine knowing when the market's about to hit rock bottom. What if you could buy when everyone else is selling, positioning yourself for some serious gains? In this post, we'll show you how it's done.
Recently, the US markets went through a significant correction. But instead of panicking, Jack Corsellis used it as an opportunity. He managed to enter long-term positions within 1% of the market bottom. Seriously impressive, right?
So, how did he do it? That's what we're here to explore. We're going to break down the key indicators that helped him identify a reliable, long-term market bottom.
Big thanks to Market Surge, today's video sponsor. They're Jack's go-to for analysing company fundamentals. If you're interested in a discounted trial, you can find the link in the description: Market Surge Discounted Trial.
Here's what we'll be covering:
- Market Breadth: Gauging the market's overall health.
- Market Character: Understanding how the market behaves.
- Volatility: Using the VIX to read market sentiment.
Understanding Market Breadth: Gauging the Market's Overall Health
Market breadth tells you how many stocks are participating in a market move. Are just a few big names carrying the market, or is there widespread participation? It's like checking if everyone's on board, or just a few people paddling the canoe.
Jack uses the S&P 500 percentage of stocks above their moving averages. This helps him see the bigger picture. Let's look at the two key indicators he uses:
- S5FI: S&P 500 percentage of stocks above their 50-day moving average. The 50-day moving average shows the short-term trend. If a stock is above its 50-day moving average, it suggests it's in an uptrend.
- S5TH: S&P 500 percentage of stocks above their 200-day moving average. The 200-day moving average gives you the long-term trend. It's a key indicator for spotting potential reversals.
Overbought and Oversold Levels
These indicators are measured as percentages. Here's how to interpret them:
- Greater than 75% = Overbought (the tide is in). This means most stocks are above their moving averages, and the market may be due for a pullback.
- Less than 25% = Oversold (the tide is out). This means most stocks are below their moving averages, and the market may be ready for a bounce.
Using the 200-day Moving Average to Spot Opportunities
The 200-day moving average is a solid tool for finding potential market bottoms. Think of the market as having a "tidal" nature. When the tide is in (overbought), it's bound to go out. And when the tide is out (oversold), it's likely to come back in.
If you look back at historical examples, you'll see this pattern play out:
- Late 2018/Early 2019
- COVID crash
- 2022 bear market lows
These oversold readings often happen when:
- The news is bad.
- There's a lot of fear in the market.
- Emotions are running high.
How to Use the 50-day Moving Average
The 50-day moving average is closer to the price action, so it gives you more frequent overbought/oversold signals. It's useful for shorter-term analysis, but the 200-day moving average is better for spotting those major turning points.
Emotions and Contrarian Thinking
Here's a crucial point: the best time to buy is often when emotions are at their worst. When everyone else is panicking, that's when you should be getting greedy.
Warren Buffett put it best: "Be fearful when others are greedy, and greedy when others are fearful." Wise words to live by.
Setting Up the Indicator in TradingView
Want to use these indicators yourself? It's pretty simple to set up in TradingView. Just use the rectangle tool and a horizontal ray for the level.
If you're new to TradingView, you can use Jack's TradingView referral link to get started.
Understanding Market Character: Spotting Key Reversal Patterns
Market character refers to the market's behaviour. Has it been going up steadily, or has it been volatile and unpredictable? Spotting patterns in this behaviour can give you an edge.
One pattern Jack noticed was "gap down reversal bars" on Mondays.
Gap Down Reversal Bars
For months leading up to the market bottom, Jack observed this pattern. So, what is it?
A gap down reversal bar is when the price opens lower than the previous day's close (gaps down) but then rallies to close higher. It's like the market tries to go down, but then changes its mind and heads back up.
The April 7th Capitulation Low
The capitulation low (a point where investors give up) occurred on Monday, April 7th. The market traded down to a prior low.
Examples of Previous Gap Down Reversal Bars
This wasn't a one-off event. Jack had seen it before:
- August 5th
- January 13th
- February 3rd
- March 31st
This pattern suggested that the market was setting up for a potential reversal.
Scare You Out or Wear You Out
During corrections, the market tends to either "scare you out" or "wear you out".
- Scare You Out: A sudden, sharp drop that causes panic selling.
- Wear You Out: A prolonged period of sideways or slightly downward movement that frustrates investors.
Leading up to April 7th, the market had been "wearing people out." The April 7th gap down was the "scare you out" moment.
Echoes of History
This pattern isn't new. Think about Black Monday in 1987. A weak Friday close, followed by a big gap down on Monday. Market capitulations often happen on Mondays.
Trump's Tariff Pause
Adding fuel to the fire, on April 9th, Trump announced a 90-day pause on tariffs, boosting the market.
Understanding Volatility: The VIX and Market Sentiment
Volatility is another key factor in determining market sentiment. It measures how much the market is moving up and down. High volatility means big swings, while low volatility means relatively calm trading.
The VIX (Volatility Index) is a measure of S&P 500 volatility. It's often called the "fear gauge" because it tends to spike when the market gets scared.
The Three Volatility Regimes
- Money Bucket: Falling and prolonged low volatility (money seeks assets). This is when the market is calm and investors are confident. Money flows into the market.
- Whipsaw Volatility Regime: Quick and decisive moves in the price. The market makes rapid, erratic movements.
- Danger Bucket: Rising and high volatility (money flees assets). This is when the market is in turmoil. Investors get nervous and pull their money out.
Money loves falling and prolonged low volatility. When the market is calm and trending upwards, investors are happy to jump in.
Think back to 2013 and 2017. These were years with low volatility and strong market performance.
High volatility, on the other hand, scares money away.
The Significance of the VIX Spiking Above 50
When the VIX spikes above 50, it's a sign that the market is in serious distress. Historically, this has often coincided with market bottoms.
Examples of VIX spikes above 50:
- 2008/2009 financial crisis
- COVID crash
VIX spikes above 50 are rare, so pay attention when they happen.
Combining VIX Spikes with Other Indicators
It's helpful to relate VIX spikes to the S&P 500 percentage of stocks above their 200-day moving average. When the VIX is spiking and the 200-day moving average breadth reading is in oversold territory, it's a strong signal that a bottom may be near.
Remember, a VIX spike above 50 doesn't happen often.
Combining the Indicators for Maximum Impact
The best opportunities come when all three indicators line up:
- 200-day moving average breadth readings in oversold territory.
- Gap down reversal bars on Mondays.
- VIX spiking above 50.
In the recent market correction, these indicators all pointed to a potential bottom. The market was correcting due to uncertainty and self-inflicted tariffs. When Trump reversed course, the markets rallied.
Conclusion
So, there you have it. By understanding market breadth, market character, and volatility, you can improve your chances of spotting market bottoms.
Remember these key takeaways:
- Watch the 200-day moving average breadth reading for oversold signals.
- Be aware of gap down reversal bars on Mondays.
- Pay attention when the VIX spikes above 50.
And most importantly, remember Warren Buffett's words: "Be greedy when others are fearful and fearful when others are greedy."
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Disclaimer: Trading involves risk. All investment decisions should be made with the help of a professional and after conducting your own research.