FINDING LONG TERM BOTTOMS IN STOCKS USING CHARTS
Since most people on this site are looking for good value buys, I thought I will throw my hat in the ring of how one can find some candidates making a bottom using technical analysis.
Over the last several decades that I have been practicing TA, I have created my own method of mapping a bottom. There is no right or wrong way. This is just my way. It works for me, so i am presenting it for serious members here. It is a longish post so exercise some patience as you read.
The bottoming process on a chart has to go thru the following steps. This entire process takes anything from 5-10 years. Use Weekly candle charts, with Vol, Rsi and Adx indicators added.
1. Stock will be into a long decline- a few years.
2. After hitting a bottom, the stock then begins a phase consolidation i.e. sideways movement- lasting another year or two.
3. It may make a new low during this phase but the Divergence patterns on the momentum indicators (use RSI or Ultimate Osc- those show the divergence pattern the best) will begin to appear.
4. Then we will get a sharp 'bear market rally'. The prices will rise (most of the time as a nice 3-wave advance, on good volumes. This is created by early value hunters and perhaps some localised news.
5. Such a rally will be fooler and is subsequently retraced fully, with prices falling even to new lows.
6. A tell-tale sign that the rally will not last is given by the DI lines which will not maintain the bullish dominance (+DI remaining above -DI) and quickly surrender it.
7. The new low (or perhaps a double bottom) will be made on high volumes (sometimes climax volumes may also be seen).
8. Candle patterns of reversal begin to appear at such stage as the seeds of the new bull market are sown here.
9. Another rally will now occur, not as large as the previous one (point 4) but this will start wearing better momentum characteristics.
10. Prices will decline yet again, but will now start making higher bottoms (seldom more than two). During such pullbacks- part of the new rise- the RSI will show the classic Range Shift signal. This is one of the keys.
11. During the fall the ADX line will mostly record a new low as well. But the DI lines will NOT cede control or will regain it very quickly. This is another key element of the turn.
12. A new rally will emerge after the higher bottom retest and the range shift and this will be on higher volumes and the RSI will hit new highs.
13. By now bullish patterns will start showing up on the charts ( traditional H&S or Rounding or some such OR candle patterns on Monthly or Quarterly charts).
14. News flow will start turning much better and certain positive events will begin to occur.
This is the beginning of the rebuilding phase. In 7 of 10 cases, the stock never looks back.
As an example, check out Rel Capital, IB Real, Suzlon etc with the above pointers.
Thanks for reading. Happy bottom fishing!