Traders Toolbox: Bottoming behavior

Markets which have been in a persistent downtrend often exhibit a common pattern as the end of the decline is approached. The pattern is to post a sharp rally followed by one final decline to new lows.

Sharp rallies formed recently in both pork bellies and gold. Following the rallies, both markets plummeted to new lows. However, once new lows were made, the declines stalled. The failure to sustain the break on the move to new lows indicated the selling was effectively exhausted and potential bottoms had formed. A similar pattern marked the low in soybeans prior to the 1983 bull market.

The logic behind this type of bottoming action is that the persistence of the downtrend has finally forced the bulls out of the market. As the last longs are liquidated, the burden of keeping the down-move going falls totally on the shoulders of the bears to keep pressure on. Any faltering of the bears to keep the pressure on can lead to a sharp short-covering rally as the sellers "all" turn buyers.

Any hint of bullish news accompanying the short covering rally will tend to entice the emotional bulls back into the market. Then, as the bullishness diminishes, the sellers try to reassert themselves. Often a push to new lows occurs and the stops of the early bulls are triggered. The stops provide additional short-term selling pressure. When this subsides and the bears find no more selling entering the market, they head for cover in a more orderly fashion.

A relatively gentle up-move starts as the market searches for the levels which will entice sellers back into the market. From there, the burden of proof falls on the market to determine if the bulls are now the strong hands or if the bears can regain their control.

11 thoughts on “Traders Toolbox: Bottoming behavior

  1. (The dome's position is April 84 in the soybean-chart, of course; not 83, as indicated.)

  2. Re the "Jan. 84 Soybeans" chart above: I've not been following the soybeans, so this is just a general technical comment on the chart above.

    The inverted cup pattern is shown with its corresponding "central dome" in april 83, giving the target for the upmove in july 84. The RSI>50 for the complete inverted cup (technical bullishness: upturn is steeper than downturn and central line is located to the left in the inverted formation - to the right in an ordinary formation), and a 4-month bullish pressure among the actors are hence indicated.

    As a target usually is the double of a formation, and since the distance between 620 and 710 (bottom and top in the inverted cup) is 90, the target for this complete formation was 800. I've not checked if that was the case here, but that's the theory anyway.

    Happy trading 🙂

  3. To my mind, it is not a fight between bulls and bears, I think the bulls and bears story is the Wall Street fairytail to fool as many people as possible.
    To my mind, these are the banksters, controlling and rigging the market, which try to pay the less possible number of short traders, so they engineer a nice rally triggering short covering and THEN, only then!, they allow the market to reach the target price on the base of the technical analysis. So only the traders with "ice in the veins", which is not always so easy to have but it is not impossible, get payed "in full".

    All the best
    Grace

  4. I think it is important to quantify relative swing lengths as well a when they occur such as end of month or beginning, relative to

    contract roll over, to a "Time" bottom, stall or reversal. Time as a "Point" "When" as well as a Component of Momentum and the

    "Momentum Reversal" which the article emphases as the first heads up to the larger trend turn around.

    Gold almost has a 1st of a dbl btm and lower channel break down acceleration before beginning June.

    Where as Bellies has an external retracement (extension) failed dbl btm recoil, but channel symetry a June start.

    And Beans has an expanding channel symetry inside a broader dbl btm and a 3 day abandoned baby gap sandwich at the end of
    June followed by massive gap ridden rally.

    But of all this action, the basic and obvious the DBL BTM in Price occurring at Time month's end stand out most, next the momentum bars and gaps.

  5. Amanda,

    Patterns repeat all the time in the market both in the daily, weekly and monthly charts.

    All the best,
    Adam

  6. Hi Steve,

    It appears that Apple is on a sharp uptrend only to retrace to new lows then on a move to new highs.

  7. Hi Edy,

    I'm not certain I agree that the DOW is doing this now. On all three of these charts, the pullback surpasses the previous low, which hasn't happened here. I think on the short term chart we have broken out of a rising triangle, but conviction is low based on trade volume.

    I think we're putting in a top in this short term rally. however, that doesn't mean I'm ready to start shorting the market as the signs just aren't solid enough one way or the other. For me, this is a good time to sit out and weight for more clear signals

  8. I'd just like to throw my .02 in here...
    Price patterns, including bottoming patterns can not be confirmed without corresponding volume changes.

    Adam, if you'd please describe the volume changes that accompany this pattern, I think the community will benefit much more from it.

    -Steve

  9. Like your analysis. The DOW is forming that very pattern right now and it will be interesting to see if the patern holds. Look at the 50 day MA of the DOW and you'll notice a rebound when the daily touches the MA. I wonder if the daily value hit the MA in the examples that you used?

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