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. 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, and it doesn't have much controversy surrounding it.
If you can find the exact reversal in these stocks, you can 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 whether the stock will go up or is bearish. So many different patterns can play out when I look for a stock bottoming out. In this article we will focus on the following occurring all AT THE SAME TIME:
- The Stock Gaps Down. This is very important as they are a sign of exhaustion. However, they can also start a new bullish/bearish trend. You need experience and context to determine which. Obviously when my stock has to bleed 50% and then gaps down, it's safe to say the sellers are exhausted.
- The Stock opens up below the lower Bollinger Band, which indicates that it is oversold. I highly recommend that you understand Bollinger Bands. I have written a great starting point: Why Mastering Bollinger Bands Is A Must.
- 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 that 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.
- 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 rarely the bottom.