Wednesday, August 6, 2014

Potential Bottom Reversal Today

Based off of today's price and sentiment action, my bottom picking system has noted this as a possible inflection point.  The current signal is only at a 2 month low, and I view it as somewhat less significant and reliable than signals that happen at 3 month lows or more.

When a signal like this occurs, I don't consider the signal to get confirmed unless the reversal day's high is exceeded.  So, a higher high tomorrow would be a potential buy signal.

The recent signals going back to the May 2011 high are listed in the picture below.  Not all signals were confirmed with a higher high, but if you want to look at a price chart to get a feel for where these signals show up, and what the reward to risk profiles have been, then these will give a decent start.

Most of those signals either market significant lows, or led to at least a short term (1 day or more) price rebound.  Again, these signals are not super high specificity, they are designed to be highly SENSITIVE, so that just about every significant market low in an uptrend will be flagged for a buy.

Click on Chart to Enlarge

This chart shows a graphical/quantitative picture of the indicator that is evaluated into the logical buy signals such as those above.  This gives a sense of the magnitude of panic in the market relative to past market action.  We see that currently the level is approximating the levels of market panic at most of the lows the last 2 years.  The June 2013 saw higher panic levels, and it also was of longer duration and greater magnitude than the other corrections shown on this chart.

So this is just an objective heads up that if stocks are to continue an uptrend, this would be a logical point for a potential reversal. If buying long, the stop would go below today's low.  An exit signal would be taken at an opposite statistical extreme, or a stop movement mechanism could be used if prices rally from here.

So don't necessarily take this as a trade.  But use it in your analysis for a potential long trade set-up.  And as always, the key is managing the trade in terms of stops and having a definitive/objective profit taking or securing method as the price action unfolds.


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