This Low Is Different From the Last

I remember talking to JC about the lows in January, and neither of us was too excited about the way things were shaping up then. Why?

Well, for the large-cap indexes, that was the first real lower low since COVID. There were no bullish momentum divergences and there were no higher lows from an intermarket or risk appetite perspective.

Momentum was hitting oversold for the first time in years in a lot of charts, and the laggards couldn't string together more than a day or two of gains.

There is a popular saying on Wall Street that goes like this: "Bottoms are a process, not an event."

And in January, that process was still just getting started. Here's what the Nasdaq looked like then:

Long story short, there wasn't much to be bullish about...

And here's what it looks like now:

During the last few sessions, price undercut the January lows, but downside momentum hasn't kept pace. This is evidence that sellers are getting tired.

It tells us the environment is ripe for buyers to step in and regain control.

Whether or not it actually happens is something we can only know with hindsight. But with bullish momentum divergences and potential failed breakdowns all over the place, we think there's a good chance.

Another thing that stands out today is the action from the weakest stocks. We call this kind of behavior a "dash for trash," which means that the worst-performing stocks experienced the most buying pressure.

Square $SQ is an excellent example:

The stock is down roughly 70% since its highs last August, but it was higher by 7% today and is following through in the after-hours session on the heels of a strong earnings report.

Another thing we're seeing right now is laggards like SQ running into critical former highs from 2018, 2019, or even the pre-COVID highs.

Not only does it make sense for stocks to find their footing at these polarity zones, but it gives traders a well-defined level of interest to define their risk.

And Square is not the only stock that looks this way right now -- we're seeing similar action from growth stocks in general...

Here's the ARK Innovation ETF $ARKK with the same look and a bullish engulfing candle on the daily chart:

Will buyers finally dig in and start to carve out a tradable low at these former highs? We think the odds favor the bulls here.

And here's one of my favorites. This is the online gambling platform DraftKings $DKNG finding its footing at its pre-COVID highs:

If you're looking for a mean-reversion trade here, you either want to set your stop at the January lows or key former highs. In the case of DKNG, these both line up at the same level around 19, giving us a confluence of interest to trade against.

So, let's recap.

What are some of the key characteristics of a bottom that are appearing right now?

Bullish momentum divergences. Failed breakdowns. Potential ones, at least. Engulfing, and other bullish candles. And retests of former resistance, which simply means we are at logical levels where we can expect demand to enter the market.

Last but not least, let's check in on an area of leadership. Small-cap value stocks have continued to hold up far better than their peers. Here's the Russell 2000 Value ETF $IWN:

While more and more consolidations are resolving to the downside, IWN continues to dig in and defend its range from the last 12 months. In addition to the constructive price action, we have a bullish momentum divergence in the RSI-14.

Seeing the leaders hold firm during periods of volatility is always a good sign.

The takeaway is this: We're seeing a lot of evidence that a tradable low has been made.

While the laggards are finally finding their footing and look ready for a mean-reversion move higher, the existing trends in the leaders have more or less remained intact.

As for those areas that appear to be making downside resolutions this week, we want to pay close attention in the coming sessions as we think these could be major shakeouts. And that would be more bullish information.

Whether or not this was THE low or not, we can't say. But there's certainly a better case to be made for it than the lows we experienced in January.

For now, we can trade these mean-reversion moves but only with the intention of making some money off a quick bounce.

If they materialize into something more, that's great. We can get long again when we have more information.

But, until then, we want to be tactical and sell into strength. If this is truly THE bottom, there will be plenty of time and future opportunities to cash in on it.

And we'll be right here with plenty of ideas on how to express that thesis.

Let us know what you think. Are you buying these lows? Or are you waiting it out?

Allstarcharts team.