Trading Lesson of the Week

Check back weekly for another free trading lesson:

The Bottom Fishing Pattern

In This Week’s Issue:

  • Stockscores Market Minutes Video – When to Sell a Winning Stock Trade
  • Stockscores Trader Training – The Bottom Fishing Pattern
  • Stockscores Feature Strategy – Bottom Fishing the Cannabis Stocks

 

Stockscores Market Minutes – When to Sell a Winning Stock Trade

How do we know when to sell a winning stock trade? There are a lot of emotional and financial considerations that affect our decision making process. This means we need a methodical way to answer the question and this week, I show you a simple way to know when to sell. Plus, my weekly market analysis, a Market Scan and the day trade of the week on MR.

Click here to watch this week’s Market Minutes

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Commentary of the Week – The Bottom Fishing Pattern

Everyone loves to get a good deal and we tend to be attracted to things that are on sale. In the stock market, this means buying stocks that have been going down dramatically recently. However, a stock is only a good deal if it is more likely to go higher in the future. Stocks that are in downward trends can continue lower for a very long time and buying them while they are in their downward trend is like trying to catch a falling knife. It can hurt.

There is a pattern that is pretty reliable for predicting when a weak stock has bottomed and is likely to move higher. I call it a Bottom Fishing pattern and it has three stages.

First, the stock has to break the downward trend. To determine if it has, draw a line across the tops on the chart. If the price action is moving up through the line, it has broken its downward trend line.

Second, there has to be the formation of a rising bottom on the chart. This means that the last pull back in price did not hit new lows in the downward trend. Instead, it bottomed at a low point that was higher than the previous low.

Finally, the stock is breaking up from the rising bottom.

Usually, these things happen in the order I have described them but it is also possible that they all happen simultaneously. This means that the stock could move up in price from a rising bottom and also break the downward trend line – all in one step.

It is important to understand why this is a reliable pattern. A downward trend shows that the sellers are more motivated than the buyers. A break of the downward trend line is a sign that the buyers are finally motivated to buy the stock aggressively, something that typically happens when they believe that the fundamentals of the business are worth more than what the stock is trading at.

A rising bottom is a sign of optimism. The last time the stock was weak and the sellers were able to push prices down, the stock bottomed out a low price that was higher than the previous low. This means that the sellers are not as motivated as they were in the past, making the formation of the rising bottom.

The pattern demonstrates a change in investor psychology with a shift from fear and panic to optimism. Price gets so low that the buyers are motivated to act and the sellers are not. Fundamentals may be improving, giving the buyers another reason to act.

This week’s feature stocks utilize this pattern so check out the charts below to see if you can spot the three components of the Bottom Fishing pattern.

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