4 things that must happen before the bottom and the rush

  • There’s some work the stock market needs to do before it hits bottom and moves up, according to Ned Davis research.
  • The research firm highlighted the four things that must happen for the stock market to hit bottom.
  • Stocks have been in frenzy and start to rally which are eventually sold off as investors head lower significantly.

Stocks continue to stage fake highs that are eventually sold off to new lows as investors turn increasingly bearish in the market.

This can be seen in Tuesday’s trading, with the Nasdaq 100 down more than 3% after rising on Monday. The Nasdaq is down about 30% since the start of the year, while the S&P 500 is down about 18% over the same time period.

To avoid the frustration of trying to invest and capturing a bottom during a market downturn, Ned Davis Research has put together a list of the four things that must happen before a bottom is truly in a stock.

“Financial markets are looking forward, so price-based or technical indicators are likely to be the first to suggest that a downtrend has turned to an uptrend,” NDR said. These are the four steps the market usually takes to create a sustainable bottom and rise in stocks.

1. Oversold

“The first step is for the market to drop to extreme oversold levels. By many objective measures, the market can be described as oversold,” NDR said, noting that the S&P 500 has fallen for seven consecutive weeks, trailing only the lines Losers in 1970 and 2001. “The selling was relentless,” said NDR.

2. Gathering

“Every cycle is different, but at some point, sellers become exhausted, and the market registers a multi-week high,” NDR said, noting that the average rally after a waterfall drop like the one the market is currently experiencing continues with an average of 25 days with 14% gains.

“Importantly, look for broad participation in the rallies, including an increase in the proportion of stocks above their short-term moving averages and upside volume,” NDR said.

3. Retest

“Most of the waterfall retests are after dips,” the NDR said, while noting that previous waterfall dips in 2018 and 2020 did not. “For this reason, we will still look for a retest, but we are leaving open the possibility that the market will skip the third step,” NDR said.

“Successful retests do not necessarily mean that common rates should remain above their lower lows. Only
Three of the 12 tests re-do this… Instead, look for positive differences, such as sectors and stocks dropping to new lows, as well as lower overall volume and lower downside volume.”

4. Breadth of directions

“The early stages of an ongoing uptrend often involve stocks rising all together. That way, if some industries falter, many others can support popular averages. A very high percentage of stocks rally is called supply trend,” NDR said.

“The bottom line is that the market has made the first step (oversold) and is trying the second step (high). Until the market can move to the fourth step (the broad trends), we see [bottoming] The report concluded that the process is continuing.”

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