Simple Indicators and Setups #4: Hunting for the Bottom
Now that it looks like that blip on the radar is behind us on 
ES1! and 
SPY, I wanted to take some time to go over a couple of things I look at to gain confidence that the end of the dump is near whenever these drops happen. These are purely price-action and volume related, no fancy indicators or anything involved (thought I do use other things in addition to this). While reading, keep in mind that I more or less solely trade SPY and ES Futures these days, so a lot of my numbers are based on those assets. If you want to follow what I do, you'd definitely want to do some historical research into how the assets you trade behave.
I wanted to do something like this for two reasons:
So the market took a big fat shit on November 26. As is always the case, Twitter exploded with bearish FURUs rending their clothes screaming the end is nigh, bearish "CaTaStRoPhIc CoRrEcShUn" posts flooded TradingView, the whole terrible movie that plays out every time. While these guys are losing it, I was looking at some pretty basic numbers to inform my thoughts on when we hit bottom. Here's the basics of what I was looking for:
Volume
A market dump is characterized, in part, by a spike in volume. As people and institutions unload shares on top of the intraday market volume, you see sometimes extraordinary spikes in volume. It happens essentially 100% of the time when the market violently dumps over a period of days.
This alone tells you something incredibly important: if market dumps are characterized in part by a spike in volume, then logically their end is signified by a reversion to the volume levels prior to the dump.
If you look back historically (even for the COVID dump), this is a setup you find signifying the end of more or less every single dump in the market. When people stop being scared, they stop selling and they often start buying. So what I look for is when volume closes out the day at or below the same level as the last day before the dump started.
Price Action
Price never lies. It is what it is. It's important to watch price action generally speaking, but for trying to find the bottom of a dump it's important to look at daily price action in context with volume as well as historical price zones that can show zones of demand (or support ranges) that provide legs.
The first price action point I look for is when daily price closes as either a bullish engulfing candle, something close to it, or greater than .75%. I want to see that on the same day that the volume dies down to at or below the volume on the last green day prior to the first day of the dump starting.
The second price action point I look to is defined zones of support (demand zones). I use a lot of support/resistance lines on my charts but I definitely weigh more toward the use of zones because no line is magic and people don't buy or sell at the same price across the market. In my opinion, zones are where it's at.
I look to where price accumulation has occurred in the past and define the upper/lower ranges of the zone based upon those ranges. One zone of accumulation may be all you can get when you're in clear-skies territory on a rocketship to the moon. But when you have more than one that helps establish the demand zone of your asset, that is an incredibly strong support.
Summary
There's no magic way to time the bottom of anything and you definitely (in my opinion) don't want to be in the position of catching a falling knife. The goal isn't to be the first person to perfectly time the bottom, the goal is to know what your criteria are for feeling comfortable going long. I use other indicators in tandem with the two fundamental basics I cover here, they are mostly for confirmation or disconfirmation of my assumptions. Above all else, I look for, and recommend others look for, price action and volume as the true north star.
ES1! and SPY, I wanted to take some time to go over a couple of things I look at to gain confidence that the end of the dump is near whenever these drops happen. These are purely price-action and volume related, no fancy indicators or anything involved (thought I do use other things in addition to this). While reading, keep in mind that I more or less solely trade SPY and ES Futures these days, so a lot of my numbers are based on those assets. If you want to follow what I do, you'd definitely want to do some historical research into how the assets you trade behave.I wanted to do something like this for two reasons:
- Price action and volume are everything
- The numbers that underlie all of those indicators you use actually mean something and are grounded in the real world
So the market took a big fat shit on November 26. As is always the case, Twitter exploded with bearish FURUs rending their clothes screaming the end is nigh, bearish "CaTaStRoPhIc CoRrEcShUn" posts flooded TradingView, the whole terrible movie that plays out every time. While these guys are losing it, I was looking at some pretty basic numbers to inform my thoughts on when we hit bottom. Here's the basics of what I was looking for:
Volume
A market dump is characterized, in part, by a spike in volume. As people and institutions unload shares on top of the intraday market volume, you see sometimes extraordinary spikes in volume. It happens essentially 100% of the time when the market violently dumps over a period of days.
This alone tells you something incredibly important: if market dumps are characterized in part by a spike in volume, then logically their end is signified by a reversion to the volume levels prior to the dump.
If you look back historically (even for the COVID dump), this is a setup you find signifying the end of more or less every single dump in the market. When people stop being scared, they stop selling and they often start buying. So what I look for is when volume closes out the day at or below the same level as the last day before the dump started.
Price Action
Price never lies. It is what it is. It's important to watch price action generally speaking, but for trying to find the bottom of a dump it's important to look at daily price action in context with volume as well as historical price zones that can show zones of demand (or support ranges) that provide legs.
The first price action point I look for is when daily price closes as either a bullish engulfing candle, something close to it, or greater than .75%. I want to see that on the same day that the volume dies down to at or below the volume on the last green day prior to the first day of the dump starting.
The second price action point I look to is defined zones of support (demand zones). I use a lot of support/resistance lines on my charts but I definitely weigh more toward the use of zones because no line is magic and people don't buy or sell at the same price across the market. In my opinion, zones are where it's at.
I look to where price accumulation has occurred in the past and define the upper/lower ranges of the zone based upon those ranges. One zone of accumulation may be all you can get when you're in clear-skies territory on a rocketship to the moon. But when you have more than one that helps establish the demand zone of your asset, that is an incredibly strong support.
Summary
There's no magic way to time the bottom of anything and you definitely (in my opinion) don't want to be in the position of catching a falling knife. The goal isn't to be the first person to perfectly time the bottom, the goal is to know what your criteria are for feeling comfortable going long. I use other indicators in tandem with the two fundamental basics I cover here, they are mostly for confirmation or disconfirmation of my assumptions. Above all else, I look for, and recommend others look for, price action and volume as the true north star.
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