How To Tell If A Stock Has Bottomed Out

Trading stocks in a bearish environment can be daunting, especially for new traders. It feels like your stock can continue to bleed with no end in sight. I know it can cause quite a bit of stress. However, pullbacks on fundamentally sound companies are usually a golden buying opportunity.

What I mean by "fundamentally sound" is no red flags in the company: it's not a meme stock, it has insane growth, it doesn't have much controversy surrounding it.

If you can find the exact reversal that occurs in these types of stocks, you can really make an insane amount of money, as they tend to bounce back really hard as shown in the real-life examples below. In this article, I will show you how to perfectly identify one bottom reversal pattern that can end up helping you make a ton of money.

How To Tell A Stock Has Bottomed

Countless times in this blog I have mentioned you need a "cluster of indicators" to buy and sell. This means you need more than one indicator telling you the stock will go up or the stock is bearish. So when I look for a stock bottoming out, there are many different types of patterns that can play out. In this article we will focus on the following occurring all AT THE SAME TIME:

1. The Stock Gaps Down. This is very important as they are a sign of exhaustion. However, they can also one the start of a new bullish/bearish trend. You need experience and context on how to determine which. Obviously when my stock has to bleed 50% then gaps down, it's safe to say the sellers are exhausted.
2. The Stock opens up below the lower Bollinger Band. Being below the lower Bollinger Band is a sign that a stock is oversold. I highly recommend you understand Bollinger Bands, I have written a great starting point: Why Mastering Bollinger Bands Is A Must.
3. A bullish candlestick at the close. A bullish candlestick at the close. This can be a hammer with a long wick, or better yet, a candlestick where it closes at the highs of the day where it's bounced at least 5% from its lows. Check out my article on Mastering the Art of Japanese Candlestick Reading.
4. Bonus-Understanding the catalyst surrounding the strong sell-off. For example, is this the final day of a lock-up period? Normally you don't want to buy a stock that sells off huge on the first day of reporting earnings. That is almost never the bottom.

Real-Life Examples Of Stocks Bottoming

The first example is Lucid Motors ($LCID), where the stock bottomed upon the lock-up periods. Notice how it has everything I listed above, a gap down, the price below the lower Bollinger band, and a strong candlestick for that day.

Another example is FuboTV ($FUBO) where it shows almost the exact same pattern: a gap down, closed way below the Bollinger band, and closed with a strong candle.

Finally, Virgin Galatic ($SPCE), it's exactly the same pattern: a gap down opened below the lower Bollinger band, and closed with a strong candle!

Conclusion

Hopefully, you can an idea of how I detect bottoms. However, note that not all bottoms will play out like this. You need to also understand the current global news events as well as pay attention to S&P 500 and Nasdaq charts ($SPY $QQQ). 

A good rule of thumb is once everyone is in real panic mode and it becomes scary to purchase stocks, that is really about the time you should. Try to avoid options and pick quality fundamentally sound stocks, and you should be okay. Swing trading is where the money is at.

If you enjoyed this article, check out how the article on breaking down parabolic stocks.