Relatively simple chart/technical aspects, including the psychology of low trader bullishness, can pinpoint a likely bottom. Finding tops is a trickier proposition typically, with less inputs.


"you wrote the weekend that important aspect of the recent rally was disbelief in its staying power. What guides useful to getting into a bottom early? today's roller coaster up down and up again is continuing a strong move. maybe today traders finally bought the dip."


Yes, today was the first day since the bottom that traders were strong buyers of equities calls relative to equities puts. This after gains from the last low in the S&P 500 (SPX) of nearly 200 points. You might wonder what traders were 'waiting' for! I tend to think of this dynamic, and it's a psychological thing, as waiting for the 'herd' or waiting to see 'the whites of their eyes' as in a herd of bulls!

The psychology of trading is understandable in terms of an average options trader. Typically, only a relatively small or select group of traders sense when a significant bottom (or top) is made in the major indexes. Only a very few investors bought Netflix and Apple at 15 and Google before it was the next big thing and so on.

I follow a rather simple mix of chart patterns, technical and psychological indicators but do keep in mind that I advocate that 'less is more' in trading. There are only a handful of times in a year where the odds are stacked in my favor in terms of risk to reward in buying calls or puts in a directional trade; i.e., where a significant trend reversal could be at hand.

The select few chart/technical/psychological patterns in a compelling BOTTOM in a long-term bull market trend typically involves:

1.) A pivotal chart pattern such as a key upside reversal or an upside reversal at a prior low such as seen with a double bottom.

2.) Coupled with an oversold extreme low in terms of a 13-day Relative Strength Index (RSI).

3.) Coupled with an extreme in bearishness, seen seen by a LOW level of bullish sentiment measured by a daily (sometimes also seen in a 5-day average) ratio of CBOE equities-only call volume divided by daily put volume.

The pattern seen in a tradable TOP, which in a bull market occurs a lesser number of times of course, typically involves two aspects: 1.) a 'topping' chart pattern and 2.) a high RSI. For example, a double top is accompanied by a high overbought RSI reading. Bullish 'sentiment' is typically high in a prolonged uptrend and STAYS relatively high, so extremes in bullishness is less reliable in 'timing' tops.

I need to refer to only 1 chart to demonstrate the aspects of what I've laid out as KEY criteria for me in finding the occasional top or bottom with highly favorable risk to reward potential.

Starting with the tradable top that formed late-May to late-July, the important double top is highlighted, accompanied by an RSI extreme (high) at the second top but NOT accompanied by a clear cut single extreme in bullishness. This is typical of a Index top and is not to say that there were not multiple peaks in bullishness that pointed to an 'overbought' extreme in trader sentiment, just that those extremes didn't occur close enough in tandem to the second top, of the double top, to be definitive; not like seen with the extreme lows in bullishness obviously concurrent (see chart) with the early-October bottom!


#1 chart pattern aspect:

The second bottom in late-Sept. formed a definitive double bottom which is 'the' KEY signal so to speak for exiting any puts and buying SPX calls.

#2 technical indicator aspect:

The FIRST low of the double bottom was 'the' oversold RSI extreme. The second low of the double bottom was higher than the first or showed 'higher' relative strength, which is bullish in the context of this pattern; i.e., a bullish price/RSI divergence. Price was the same as the prior low, 'relative strength' was higher. (See my continuing text BELOW the SPX daily chart.)

#3 psychological aspect of bullish/bearish sentiment:

My green up arrow highlight of my CPRATIO indicator, of an 'oversold' extreme of very low bullishness (low volume of calls to puts) occurred in the time frame of the second bottom of the double bottom SPX low seen above.

Moreover, and in answer to my e-mail query on TODAY seeming to be the FIRST time that buyers pounced on a pullback to BUY calls, the upside breakout in bullishness TODAY is seen by the FIRST occasion where my Call-Put indicator broke out ABOVE a 'neutral' range. 200 points later, traders have seen the 'whites of the eyes' of the bull herd!

Lesson here perhaps is to NOT give up the FIRST 200 S&P points to discover that the trend has turned back up!!