Have stock-market bulls thrown in the towel, capitulating to the tech-led selloff that this week saw the S&P 500 and Dow Jones Industrial Average erase their 2018 gains while pushing the Nasdaq Composite deeper into correction territory?
That’s an important question because identifying the bottom of a market washout is a contrarian process. And Tuesday’s damage, and the growing alarm around the selloff in the media, has some investors ready to argue that the worst of the carnage may be done.
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In a Wednesday note, Andrew Adams, analyst at Raymond James, pointed to a string of alarming headlines across financial news sites (including a couple from MarketWatch), and a host of other observations that he said offer “promising signs that have prevented us from losing all hope.”
These include the fact that most major indexes, including the S&P 500 SPX, +0.94% and the Dow DJIA, +0.65% have yet to take out their late October intraday lows, former tech leaders bouncing off their recent nadir Tuesday, the Nasdaq Composite’s COMP, +1.54% bounce Tuesday off a long-term support trendline that stretches back to 2009, and a similar move by Apple Inc. AAPL, +0.52% shares.
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Of particular note to Adams, however, is a chart pattern dubbed “buy, cry, die” by author Jesse Stine in his book, “Insider Buy Superstocks.” Adams quotes Stine’s description:
A favorable risk/reward setup can occur when a stock in a multi-month uptrend declines and makes three lower lows within a short period of time (usually within 4 to 5 weeks). My rule of thumb is to look for a stock (or the market) to make three lower lows with the third low ideally even slightly below the trend of the first two. This is my “BCD (Buy, Cry, Die) setup” From a sentiment standpoint, “bottom picking” investors trying to time the stock’s bottom BUY the first spike lower. At the second lower spike, these new investors CRY in anguish. At the third and final lower spike, they DIE and sell their shares in exasperation. The third spike lower is precisely where you want to be waiting with open arms. I’ve seen hundreds of stocks rocket out of such triple oversold conditions. Things in life tend to come in threes. Stock patterns are no different.
Pointing to the chart below (as it appears in the research note), Adams said it appears that a ‘BCD’ pattern has emerged in the Nasdaq, accompanied by a “sense of exasperation and resignation present across pundits and the media alike.”
Raymond James
“The index has now made three consecutive lows in a little over a month and has done so with less downside momentum on each low based on the relative strength index (RSI in lower panel),” Adams said. “This trading action all seems to support a bottom, and if the tech-heavy Nasdaq marks a major low that should be a bottom for the broad market.”
He acknowledged that stocks do need to rally “very soon” to prevent further chart technical damage that would be much more difficult to recover from.
Indeed, Chris Kimble of Kimble Charting Solutions, in a blog post, highlights the downside danger in the chart below:
Kimble Charting Solutions
The monthly chart, going back 38 years, shows the Nasdaq has spent most of the past 25 years inside a rising channel.
“Even though many feel tech has been a wreck of late, its done nothing more than decline to test rising support,” he said.
According to Kimble’s analysis, if the Nasdaq and its relative momentum index both break nine-year support, stock-market bulls could have a lot more crying to do.
