In my decade-plus in the stock market, I’ve noticed that the best traders are incredible at pattern recognition.
When a multi-month market trend finally begins to reverse, traders should be on high alert.
If you can identify a major pattern disruption before the majority of the market sees it, you’ll have the opportunity to enter a predictive trade ahead of everyone else.
But since none of us are insiders or institutional traders, how can we spot these big trend reversals with the limited information we have?
Focus on the Price Action
Yesterday we talked about the three technical indicators I never use.
Don’t overcomplicate things with confusing indicators — the best way to find trend disruptions is to focus on the price action.
For the past three months, the overall trend in the markets has been sloping downward.
We’ve also seen a shocking amount of red-to-green and green-to-red moves in individual stocks (as well as the major indexes).
This whipsaw price action has made it incredibly difficult to find A+ setups — and even tougher to trade options.
Naturally, I’m looking forward to the end of this volatile bear market.
And a few signals in Thursday’s market action made me think that the bottom could potentially be in…
Signs of a Pattern Disruption
How do we know when a major market trend reversal is finally taking place? Let’s break it down.
1. Consistent Price Action
After so many days where the market opened green only to close in the red, I’ve been patiently waiting for a fully bullish day of relief rallies.
We finally got that full first green day in the markets on Thursday.
Instead of seeing another disappointing green-to-red move in the afternoon, the major indexes rallied throughout the entire day.
Don’t sleep on how critical this first green day is for the overall markets.
After so much bearishness, this intraday rally was a welcome sight (and a potential sign that we’re near a market bottom).
2. Shifts in the News Cycle
For several months, the market has been furiously discounting a variety of negative catalysts…
Record-high inflation, looming interest rate hikes, and a possible world war have all been weighing heavily on the minds of traders since early November.
On Wednesday, Russia invaded Ukraine. The possibility of this conflict has been a major fear in the markets for months — and now it’s a reality.
That made Thursday’s rally all the more surprising to some traders who were expecting a massive market plummet on any announcement of a Russian invasion.
But I think these traders are missing something…
3. The Easing of Uncertainty
The market hates uncertainty more than ANYTHING. Even more than war.
So while war is generally a negative catalyst for markets, I think it’s acting as a double-edged sword in this case.
Bottom line: The anxiety building up to the conflict was worse for the markets than the announcement of the invasion itself.
Aside from the Russia-Ukraine conflict, I think the past few weeks have given the market much more clarity on where interest rates are headed in the near term.
I think the majority of the rate hikes are likely priced in at this point.
Now we’re at a crossroads where a lot of traders are asking themselves … how much worse can the news get?
In my experience, when it feels like market sentiment can’t get any worse, we’re usually close to the bottom being in.
I viewed Thursday’s rally as a major pattern disruption — and a potential signal that we could be close to a market bottom.
That being said, just because we’ve seen a pattern disruption doesn’t mean we’re out of the woods yet.
This market is still wildly choppy, and I recommend Evolvers be extremely cautious with their trading over the next few days.
But if we see a consistent uptrend start to form on the major indexes, I think we may look back on Thursday’s rally as a crucial pattern disruption that formed a historic near-term bottom.