How Do You Know a Market Low is in Place? These Signs Are as Strong as "Steel"
by Nico Isaac
Updated: September 01, 2022
I have a question: Would you recognize a good bottom if you saw one?
Okay, so I see how that could sound a little -- um -- risqué. But I'm not talking about human derrieres here. I'm talking about the juncture on a market's price chart coinciding with an important low, i.e., a buying opportunity.
On July 3, Forbes put its hat in the ring to answer the very question, "When Do Stocks Bottom?" The article focused on the broader U.S. stock market, and offered two criteria for gauging lows.
First, historic precedent: The second quarter 2022 saw stocks suffer their worst start to a year since 1970. This, according to the piece, could be a good sign of an approaching bottom because:
"If it turns out similar to 1970, the silver lining is that the market rallied strongly in the second half of the year."
So -- expect a bottom in Q3 2022, right? Not so fast. The piece then cautions, "Most years with intra-year declines of this magnitude end in the red."
Thus, it concludes, it would be a "fools' errand to try and predict" whether 2022 bucks the trend and ends in the green.
Another tool offered in the piece is to time stock market bottoms to economic recessions. Except for the fact that "in 11 out of the last 12 recessions, the stock market bottomed before the recession was over."
In conclusion, the Forbes article ends in a draw:
"It's impossible to time bottoms," so "focus on asset allocation of companies" that can survive stormy weather.
That's some answer to the question "When Do Stocks Bottom?" -- am I right? But this Churchillian idea of market timing as a riddle wrapped in an enigma is pervasive.
Even while there exists an objective model for identifying important market lows; namely, the Elliott Wave Principle.
Take, for instance, the venerable Big Board listee U.S. Steel Corporation, ticker symbol X. Between April and late June 2022, X plummeted 50% in value from a 3-year high to a 1.5-year low.
And, on June 30, our Trader's Classroom editor Jeffrey Kennedy confirmed that X was exhibiting several telltale signs of an exhausted downtrend. Jeff was able to label four complete waves down from not only the May 2022 high, but the larger April 2022 peak at 39.25 -- with prices falling in a fifth wave at multiple degrees.
In Elliott wave terms, five-waves in either direction is the hallmark of a complete impulse pattern. Here, the encyclopedic Elliott Wave Principle -- Key to Market Behavior takes the baton:
"In markets, progress ultimately takes the form of five waves of a specific structure. Three of these waves, which are labeled 1, 3 and 5, actually effect the directional movement. They are separated by two countertrend interruptions, which are labeled 2 and 4.
"The two interruptions are apparently a requisite for overall directional movement to occur."
(Pictured: A rising five-wave impulse)
A five-wave move must adhere to these 3 cardinal rules:
Wave 2 never moves beyond the start of wave 1
Wave 3 is never the shortest wave
Wave 4 never enters the price territory of wave 1
The five-wave decline pictured in Trader's Classroom on June 30 on the chart of X checked every necessary box and thus, the stage was set for an imminent bottom. Jeffrey's analysis was crystal:
"We're going to continue to push a little bit lower here, maybe as we move into next week, all the way down to 17.76-16.57. A few more wiggles and waves ... will finish five waves down from the high that occurred back in April at 39.25.
"We're on a 5-mile race. We're at 4.8 miles and have .2 miles to go. We need to see a reaction and for this market to digest this selloff. And the way it does that is with a price move back up to 25.
"As we transition from June to July, this is a great opportunity to see the culmination of the selloff."
This next chart of X shows what happened: Prices continued to fall, bottoming into Jeffrey's target area on July 6 at 16.61, from there staging a solid rebound to 26 (on August 26).
Jeffrey Kennedy's Trader's Classroom lessons will never give you a certain future: No market-forecasting method is perfect, after all. But they will always deliver a solid lesson in Elliott waves and other technical analysis tools -- and, along the way, often help you spot where high-probability setups lie in the world's leading ticker symbols.
X Marks the Spot of Elliott Wave Opportunities
Markets don't conform to platitudes. They conform to Elliott wave patterns.
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