If You’re Going Bottom Picking, Look For These 3 Signs First

Getting in the right names at the right time, with the right size, is something most traders simply can’t do.

Instead of stalking a name for many months, as it potentially builds out a Stage 1 Base and bottoming pattern, many traders jump the gun and cheat the process by bottom picking.

They may think they have the right name, and go in with the right amount of size, but if the technical pattern isn’t there, what’s the point? This bad habit has a real opportunity cost — the time your money is locked up in a name going sideways could be put to much better use in a name that has a chance to trend near highs.

But, if you are going to bottom pick a name, make sure to look for these 3 signs first:

Sign #1: Tight Weekly Closes

Tight weekly closes suggest that a stock is stabilizing and the general volatility associated with institutional investors accumulating/distributing shares is dying down. This exhaustion allows for many things to become clear on the chart — none more important than tight closes on the weekly timeframe.

What Tight Weekly Closes Tell Us About Institutions

William O’Neil, the founder of CANSLIM, emphasized the importance of tight price action as a sign of accumulation by institutional investors. O’Neil believed that tight weekly closes within a base were a clear indication that strong hands were controlling the stock, reducing the available supply and setting up for a significant price advance once the breakout occurs.

A Real-World Example: Tesla In 2024

Here’s an updated view of $TSLA, which displayed Sign #1 to near perfection before breaking out last week. Each close from May 15th to June 10th was within 2% of the previous week!

Sign #2: Decreasing Volume

In addition to tight weekly closes, decreasing volume during the formation of a base is a sign that both buying & selling pressure is subsiding. As volume dries up, and fewer shares are being traded, it allows for big institutions to prepare to buy more shares (and break the stock out of its current range to the upside) or sell their position entirely (and break the stock out of its current range to the downside).

An Easy Trick To Spot Decreasing Volume In A Base

One of the easiest ways to spot decreasing volume in a base is to attach a 10-week moving average to your volume indicator. Then, as you’re glancing through charts that are consolidating near the lows of their basing structure, you can quickly spot if the 10-week Volume MA has an upper left to lower right pattern.

We also recommend you plot an arrow on the chart so that the next time you come across that chart, the first thing your eyes see is the decreasing volume, called out by that arrow. We’ve done that for you in the example below.

A Real-World Example: AMD In 2023

As AMD bottomed in early 2023, it exhibited the first two signs we’ve talked about above perfectly. In the November-December ‘22 timeframe, AMD had 3 weeks of tight closes that ultimately failed to the downside. Then, from December to early January of ‘23, AMD exhibited 4 weeks of tight closes accompanied by a decrease in average volume. This decrease in average volume had now occurred over many weeks, signaling to us that institutions have stopped distributing stock & are potentially accumulating.

A look in early April of ‘23 showed the same signatures — tight closes on below-average volume, which then would lead to another big breakout.

Sign #3: A Clear Support & Resistance Level

To fully stack the odds in your favor while bottom-fishing, you must look for clear support & resistance levels. This will allow you to manage risk effectively even if you’ve entered your trade too early (or too late!).

A Market Wizard’s Perspective On Support & Resistance

Nicolas Darvas, known for his “Darvas Box” theory, focused heavily on clear support and resistance levels. He identified these levels to create “boxes” around price action, helping him determine where to enter and exit trades. Darvas believed that understanding these key levels allowed traders to capitalize on breakouts and avoid false signals, making it easier to ride the stock’s upward momentum once it broke out of its box.

A Real World Example Of Support & Resistance Deep Within A Base: APP In 2023

APP has to be one of our favorite examples of clear support & resistance all the way up the right side of a base. In early 2023, APP found a bottom (with decently tight closes near the lows), and then would go on to consolidate from February-May. Over that time period, clear support & resistance levels developed on the weekly timeframe.

If you had been in love with the story or fundamentals of this name, a breakout above this range would be a perfect early entry signal. It did that in May, before going on to consolidate and build another ‘box’ of support & resistance ranges.

As price moved through this area into August that year, another multi-month box was built with clear support and resistance zones.

As we said above, these zones allow for you to time when a stock’s trend is shifting from consolidation → trend.

BONUS Sign #4: Look At The Moving Averages!

One indicator we haven’t covered today is using moving averages on a weekly timeframe. Stan Weinstein (founder of Stage Analysis) is a big proponent of using the 10, 30, and 40-week moving averages to help visualize the different stages of a stock’s lifecycle.

Since we’re on the topic of bottom-fishing, it’s likely the stock you’re focused on is in a Stage 1 Consolidation Phase. As this stage matures, you should be using these moving averages in two ways:

• Look to see where price is relative to the MAs (above, below, or right on)
• Recognize the slope of the MAs (downtrending, uptrending, or sideways)

These two data points will tell you all you need to know about whether a stock is about to make a powerful Stage 2 advance or not. If price is below or at the MAs, it’s likely that the stock may have a little more time consolidating before breaking out. Your money is likely best put to use elsewhere. If price is consolidating above the MAs, it’s possible that a Stage 2 Advance is on the way.

You can use the slope of the MAs in the exact same manner. If the slope of the MAs is still down when you’re thinking about starting a position, it’s likely your money is best put to work elsewhere. The same can even be said for when the MAs have shifted from negative slope to no slope at all (even though this is a positive development). A powerful combination arises when price consolidates above slightly positively sloped MAs — as this tells us institutions have been accumulating shares on a long timeframe and a breakout may be on the horizon.

Today’s Main Takeaways

If you are going to bottom-fish, there are four major signs you should be looking to spot before ever starting a position. They are:

Trait 1: Tight Weekly Closes

Tight weekly closes suggest that a stock is stabilizing and the general volatility associated with institutional investors accumulating/distributing shares is dying down. William O’Neil emphasized that tight price action often indicates accumulation by strong hands, reducing available supply and setting up for a significant price advance once the breakout occurs.

Trait 2: Decreasing Average Volume

In addition to tight weekly closes, decreasing volume during the formation of a base is a sign that both buying and selling pressure are subsiding. As volume dries up, and fewer shares are being traded, it allows for big institutions to prepare to buy more shares or sell their position entirely (leading to a clear breakout one way or the other!).

Trait 3: Clear Support & Resistance Zones

To fully stack the odds in your favor while bottom-fishing, you must look for clear support and resistance levels. This will allow you to manage risk effectively even if you’ve entered your trade too early (or too late!).

Trait 4: A Close Look at the Slope & Position of Price Relative to the MAs

Stan Weinstein emphasized the importance of using moving averages on a weekly timeframe. As a stock matures in its Stage 1 Consolidation Phase, the position of price relative to the MAs and the slope of the MAs become critical indicators.