We don't search for tops or bottoms -- that's pretty much a loser's game. When we trade we look for trends, confirmations and patterns that fit with the profile of stocks on the move. Yet there is often the endless search to capture the bottom and sell at the top. Therein lies the fear/greed element that often squashes investors and traders and has them working out of a hole.
But, if you were looking for something with a good probability of a turn, the odds favor it with a confluence of indicators pointing in the same direction. Before making a bold call of direction, you want to make sure you have them lining up for you, or at least most of them.
Let's start with the VIX. With the markets in turmoil we often see the VIX in an uptrend, and that is exactly what we have working here. The moving averages are pointing up. The put/call ratio is another sign we look for to see how traders are positioning. A high put/call ratio as we have seen lately shows traders are reaching for puts and buying protection, oftentimes at the wrong moment. That's a good contrarian indicator.
At extremes we look at the high/low indicator. This is a longer-term indicator of breadth that shows the number of stocks hitting new 52-week highs and lows. We look for deep negative or high positive readings. This indicator started to roll over in September, so it gave us a good glimpse of sentiment early on.
The TRIN, or Arms Index, is another sentiment indicator that shows more panic on the volume side than breadth. Levels around 2 in this indicator show oversold readings, while if the 10-day moving average of the TRIN hits 1.50 higher there is often a very powerful bounce. Hence, it's another good contrarian tool.
Finally, any day where there is a 90% volume trend day (down volume 90%) is a good indicator of a washout low and we could expect a quick turnaround move upward. That happened last week (Oct. 16), and for one day the markets rallied sharply.
Remember, there is no sense searching for a bottom, for once one is achieved there should be plenty of opportunities opening up for you. But it's good to keep these indicators on your radar.
