Last week I did a post titled “Three Things the Bulls Need Now“. I wrote this post last after Thursday’s bounce, as many people were wondering if the correction lows had already been made. In that post I laid out concepts and tangible price patterns that would need to occur in order for that belief to become a reality. Long story short, as you know, none of the three things happened. The market quickly made new lows and has since corrected even further.
So, now we have another, similar situation. The $SPY (SPX ETF) closed today on the lows and below it’s 200 sma (first time in a couple years). The question we all want the answer is ‘What is next?’, the CNN Fear/Greed Indicator cannot be any lower (literally reads ‘zero’), individual stocks are very oversold and the $VIX is at levels not seen since 2012. There seems to be mass panic out there, but that doesn’t mean the market can’t go down further, it can.
If you are looking for a bottom, this is what you want to see in the coming days.
1. High probability Long Set Ups Return (vanished a couple weeks ago)
2. The stocks that held up the best recently ‘tighten up’ and the price contracts
- This is also known as commitment, stocks need to build institutional support and this is what that looks like within a price chart
- Often times this sort of price commitment is best shown through the creation of a bull-flag pattern
3. A MAJOR reversal and then follow is immediately needed in oversold sectors such as $OIH, $XLE. This is also needed in $IWM, $IWC.
If and when these three things occur, then we have likely seen the bottom. Until this is the case, remain defensive (cash is fine), be patient and most importantly, stay disciplined.