How to Tell When a Stock Has Bottomed

by | Jul 28, 2022 | Trading Lessons

Howdy, traders. It’s Bryce here.

How’s your Thursday going? Did y’all get a sight of those ripping benchmark indexes yesterday? Man, traders lapped up Jerome Powell’s stance on inflation. 

Speaking of ripping, I want to talk to you all about a question we get asked a lot in Small Cap Rockets — how do you know when a stock has bottomed? 

We all know that what goes down must come up … eventually … but knowing when is the key to profiting from sudden upticks. 

So today, I’m gonna share three signs that a stock has hit rock bottom and is ready to rip. One of these signals helped me nail Redbox Entertainment Inc. (NASDAQ: RDBX) this past Monday!

Three Ways to Tell a Stock Has Bottomed

There comes a time in every beaten-down stock’s life where it wakes up, sees the sunshine, and realizes there’s a lot to look forward to. Then it leaves behind its shorts-induced red candlestick ways and crosses over to the green candlestick side.

Here’s how to know when a chart’s about to reverse to the upside… 

#1 – Look Out for Exhaustion Lows

Have you ever gotten into a fight with someone you care about and you keep going at it until you’re both exhausted and realize you don’t want to fight anymore? Then you might even laugh or get inexplicably happy again because you got all the frustrations out

Stocks do a similar thing. When a stock’s been trading in the red for a while, shorts have had their field day, longs have lost interest in the fight, and eventually … both longs and shorts get tired of the trend and decide to reverse it. How do they let you, the individual trader, know? 

By signaling an “exhaustion low” — small, nearly flat, red candlesticks suddenly followed by a huge green candlestick with huge green volume beneath it. I show you a recent example with RDBX here

#2 – It Double Bottoms 

Traders want reassurance that a stock isn’t gonna go even lower than it already has been. A smart, experienced trader will wait for a stock to prove itself before taking advantage of any dip. 

How does a stock prove itself? By confirming a low multiple times. Oftentimes, a “double bottom” is enough confirmation for traders to decide that the stock is turning bullish

That is, if it hits the same low price twice and then moves up. Or even better, if it comes close to hitting a low it’s already made but stops just shy of it before turning up again. For example, if it makes a higher low the second time it comes near its 52-week low.

#3 – It Bounces Off of Premarket Lows

Long-biased traders who day trade breakouts often look for a break past premarket highs when trading in the morning session. But others prefer a different approach to trading long. 

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They skip the overexuberance and wait for a dip buy opportunity. My mentor, Tim Sykes, loves to do this. In this case, your timeframe’s much shorter than when trading a multi-day runner. 

When the stock inevitably pulls back in the volatile morning session, you want to see how it behaves when it hits its premarket lows or when it hits its previous day’s closing price. Both can act as support. If bid volume comes in quickly, that can be a bullish sign in the near term. 

Conclusion

Stocks don’t come out and tell you what they’re gonna do next. But they do give you a lot of clues. And being able to read these signals correctly is the closest thing we’ve got to a trading instruction manual. 

Thankfully, one of the best, brightest, most knowledgeable traders in the biz is spilling his hard-won secrets about how to take advantage of a unique 46-day window of opportunity happening in the stock market right now. 

Join Tim Sykes tonight at 8 p.m. Eastern time to hear all about it. See you there!

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