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3 Ways To Identify A Market Bottom

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Written by Timothy Sykes
Updated 6/17/2022 5 min read

You’d think with all the major indexes down in bear market territory we’d be near a bottom.

Heck, cult stocks like Netflix Inc. (NASDAQ: NFLX) are off more than 70% YTD…

Bitcoin is down just as much.

Thankfully, my students are staying safe, being selective on what trades they’re taking and managing risk like seasoned pros.

Now you’re probably thinking, what does a penny stock trader know about calling market bottoms?

After decades of trading, I learned that many of the same rules apply to indexes as they do to OTC stocks.

In fact, there are 3 TELLS which can point you towards a market bottom.

Most traders are unaware of what they are, but I’m going to tell you right now…

 

1. High Volume Reversal

An easy way to identify a reversal on any chart is to look for a high volume reversal.

This is one of the most tried and true ways to identify how a stock is doing.

One of my favorite setups right now is the morning panic dip buy.

In the last few weeks, I’ve used this strategy on countless charts as promoters step in to stop a sliding stock.

WikiSoft Corp. (OTC: WSFT) is a great example of a trade where I used this tactic into a heavy volume selloff.

Finding these points is fairly straightforward.

You look for outsized volume relative to recent candles around it.

With intraday charts, this can be a bit tricky around the open because there’s typically heavy volume at that time.

That’s why Tim Bohen advocates for waiting until after 9:45 a.m. to get a clearer picture of things.

Now this same concept applies as much to the SPDR S&P 500 ETF (ARCX: SPY) as it does to any penny stock.

While the volume discrepancies won’t be as obvious, there are still clear times when the SPY hits and bounces with heavy volume.

This makes it twice as important if this occurs at a key support level.

Prior lows and consolidation areas are great reference points.

2. Max Panic

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I remember clearly when the market bottomed in 2009. There was a video of the stock exchanges where it was so quiet you could hear a pin drop.

Everyone looked completely worn out.

That’s what we need in order for a market or any stock to bottom – capitulation.

It’s more than just heavy volume and everyone selling out of their shares.

I want to start hearing questions like ‘how much further can we drop’ when the market is already down 30%, 40%, or even 50%.

You’ll see it on television when the promoters that they parade onto CNBC start to get cautious — folks that have been long-term bulls.

A great way to track this is through social media and general headlines.

It’s a lot like bubbles. When people who rarely discuss the markets start talking about it, you know things have shifted.

3. Headwinds Subside

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I’m not a big fundamentals person. Especially as a penny stock trader.

But it doesn’t take much business sense to know that markets reflect the outlook for companies and those companies reflect the outlook for the economy.

Right now, all of those things face serious challenges, from supply chain congestion to oil supply, not to mention a central bank determined to crash the economy as it tries to fight inflation well after the fact.

At the same time, that’s giving me lots of trading opportunities on tiny oil and gas plays.

Eventually, those will disappear when energy falls out of favor.

But for the broader market to finally hit a bottom, it needs to forecast things getting better, or at the very least not any worse.

Final Thoughts

This isn’t the type of situation where it pays to call bottoms ahead of time.

I learned the best way to trade the market is to remain patient, cut losses quickly, and limit my risk until things become more clear.

That’s exactly what I’ve taught my students and why I’m proud to continue to add to the growing list of those becoming millionaire traders.

I want you to join them.

Take the first step and sign up for my millionaire challenge by clicking here.

—Tim


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Author card Timothy Sykes picture

Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”