Mid-week market update: The S&P 500 fell yesterday and briefly kissed its 200 dma while flashing a positive divergence on the 5-day RSI. Was that the bottom?
Here is a lesson on how to spot market bottoms, and a review of bottom spotting indicators.
Condition indicators
First of all, RSI divergence are condition indicators and not actionable swing trading indicators. They indicate that a bottom (or top) is near, but the bottom (or top) can take time to develop. I use them to exit position. For example, if I were short the market, a positive divergence would be a signal to cover my short. Even though there may be more downside, I have learned to take profits early and not become overly greedy.
Sentiment indicators are generally regarded as condition indicators. MarketWatch reported that traders had stampeded into VIX call options, which is contrarian bullish. While this does describe a sentiment condition, timing the turn using sentiment indicators can be tricky.
Similarly, NDR short-term sentiment is at an extreme reading, which is a contrarian bullish condition. It’s useful if you are under-invested and if you use it to add to your positions, but don’t try to use it for exact market timing.
Sentiment as trading signals
Sometime sentiment indicators are so extreme that I sit up and take notice. In the past, I have found that whenever the NAAIM Exposure Index falls below the lower band of its 26-week Bollinger Band, it’s an actionable buy signal that durable for several weeks. (This signal has not been triggered and readings are neutral).
The term structure of the VIX can be a useful trading indicator. I have found that whenever the 1-month and 3-month VIX term structure inverts, a market bottom is near. That’s why this is one component of my Bottom Spotting Model.
Put volume on SPY spiked to its third highest level yesterday, indicating unbridled panic. That’s another signal that a market bottom is near.
Bottom Spotting Model
Let’s review the components of my Bottom Spotting Model, which is a mix of oversold and sentiment models with different time horizons.
VIX Index: VIX rising above its upper Bollinger Band (triggered). This is an indication of a short-term oversold condition.
VIX term structure: Inverted (see above discussion).
NYSE McClellan Oscillator: Fell to below -50, which is a short-term oversold condition that usually leads to a bounce.
TRIN: When TRIN spikes above 2 at the end of the day, it’s an indication of price-insensitive selling, otherwise known as a margin clerk (or risk manager) market. Such events usually occur at the end of sell-offs. This condition hasn’t been triggered.
Intermediate term OB/OS: This is an intermediate-term overbought/oversold oscillator using the 50 and 150 dma. Triggers of this indicator are indicative of a durable intermediate-term bottom. This hasn’t been triggered.
Bottom durability
So where are we? Three of the components of the Bottom Spotting Model have been triggered. I interpret this as a signal of an imminent bounce, but not a durable intermediate-term bottom. Of my suite of bottom spotting models, NAAIM, the intermediate-term OB/OS, and insider buying. defined as buying (blue line) at or above selling (red line), have been strong indicators of durable bottoms. None of them have been triggered.
My inner trader continues to hold a long position in the S&P 500. A short-term bounce is ahead, but don’t expect much more than that. The usual disclaimers apply to my trading positions.
I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.
Disclosure: Long SPXL
It has been 8 years since you posted the interactive “Trifecta Bottom Spotting Model”. Now that you have updated the model with 5 indicators and new triggers, will you please post it and make it interactive.
The Bottom Spotting Model supersedes the Trifecta Model. In any case, the three components of Trifecta are part of the Bottom Spotting Model.
In my opinion, one must look also at where we are on the market cycle. Technical analysts tend to block out anything like the economy or fundamentals and just look at charts. That isn’t Cam. I’m just saying most do.
The markets are at the top of a huge rise from the bottom in 2022. Technical triggers should obviously be treated differently at this high than anywhere from the 2022 through to 2024 bull run. The PE multiple has gone up much more than earnings.
Look at the technicals on the charts above at yearend 2021/early 2022. That was also the top of a long bull run from the 2020 Covid low that time. The oversold signals looked the same as now but failed again and again as the bear market unfolded. Will our reliable indicators fail here?
I am wary of reliable technical tools that worked during a long bull market that went up 75%. Maybe we take another leg up and it will then be up 100%. But I’ll be much less invested and very nervous than I have been in 2023 and 2024.
You are right. Context is the first thing we have to be aware of. Every tool’s effectiveness is constrained by the context. Everyone has an amplifier and we all konw its output voltage cannot exceed supply voltage.
2022 is a rare case which came after a year of rampant speculation out of revenge against 2020 lockdown. And then market participants decided there is a recession sure to come because rates will rise up very quickly and inflation will be a major issue after Putin invaded Ukraine. That long regarded as gospel indicator 2s10s was in deep inversion but recesssion never came. Everyone forgot that there is so much savings due to gov stimmies and a long lasting revenge spending. That prompted inventor of this indicator, a Duke professor, came out last year to say patience is warranted. Recession is still probable. Today I am sure there are still many adherents of this indicator. So far in 2025 the spread had inverted by almost 50%. Two days ago it was almost at 75%. In normal times I would not count this indicator out. The market internals are weak. Many people were selling. And then Trump makes investors nervous.
First two years of a bull is the easiest. This year looks like a go-no-where for indices with plenty volativities. But it is good for short-term tradings.
Hi Cam,
Thanks for your excellent update on the Bottom Spotting Model.
I am very interested in this as I am trying to incorporate some “Oversold” elements into my general SP500 model. I have been doing a bit more research on the VIX Term Structure indicator since the weekend.
My findings align with what you have said in this post. I would characterize the VIX Term Structure indicator as an “Overstressed” market indicator which generally results in at least in a bounce. However I would not necessarily say that it is an “Oversold” indicator. From what I can see so far, for there to be some type of “durable” bottom then the “%of stocks above the 20 DMA” needs to at least dip below the 20% level. That is, the broad base of stocks in the market needs to be really “oversold” first. This is what happened on the 18th December last year when the “%of stocks above the 20 DMA” fell to 8%. What is even better is when the “%of stocks above the 50 DMA” falls below 20% as briefly happened on the 18th December when it hit 19.5%.
At the moment the “%of stocks above the 20 DMA” is still at 39.5% while the “%of stocks above the 50 DMA” is 44.7% so there is probably a little way to go before a “durable” bottom is hit.
Just a comment on Ken’s comments. I think you are still using technical analysis but generally on a longer time frame than Cam is doing which is good thing to do also. Both are useful. From the discussion above I would characterize Cam’s “Overstressed Only” indicators as only being good for a few days to a week but Cam’s “Oversold” indicators should be good for at least for a few weeks or so. If you look at Cam’s plots there were useful “durable” bottoms in June and October 2022 when the OB/OS indicator triggered.