How You Will Know When The Bottom Is In
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I bought my first kit on the day I turned 18 and took my first trade one month later.
Drumming and technical analysis are similar. Each is derived from math and based on numbers.
Drummers group notes together to form time signatures. Traders rely on indicators and studies to interpret price and volume data.
Both can be as simple or as complex as you make them, but to be successful you must understand the basics.
For drummers, that means rudiments – the sticking patterns. Every sticking pattern you play on a drum set is derived from a rudiment.
One of the most basic is the paradiddle, a series of alternating and repeating strokes between the right and left hand, notated below.
It’s the moving average of rudiments.
As simple as the paradiddle is, you will never run out of ways to use it.
It can be played on one drum or across multiple. You can use the pattern with your hands or split it up across all four limbs. It can be played accented or unaccented, varying where the accents go. You can start it in the middle, invert it, or repeat it.
But where it gets interesting is when you change the feel of the paradiddle, moving it from “straight” to a funk, swing, or New Orleans feel.
Feel can’t be taught. It has to be learned, and not everybody learns it the same way.
It’s intangible. It’s ethereal. It’s alchemy.
It’s The Jimi Hendrix Experience.
Combining a jazz drummer, an R&B guitarist, and a first-time bass player - one who rushes the beat, one who pulls it back, and one who plays right on it - and catching lightning in a bottle.
Half the year is over and there is no bottom in sight. Everybody is looking for it, but it has yet to arrive.
Will it come tomorrow? Next week? A month from now?
And how will we know when it’s here?
The short answer: We won’t.
At least not with any technical study or indicator.
If you’re hunting for the bottom, that final bottom, you can take your MACD’s, and oscillators, and overbought/oversold indicators and put them in a box with your bell bottom pants and Members Only jacket, because that is how out of touch and useless they will be.
Price action at the bottom is abnormal, skewing and distorting the technicals.
Oversold indicators stay oversold for a long, long time. Price gets extended from moving averages. Double bottoms, support levels, and other price regulators become irrelevant.
Bottoms are easy to identify after the fact, but the only way you can recognize one when it’s happening in real-time is to feel it.
Yes, I know. I just said that.
Mr. Risk/Reward Ratio. Sir Quantify Your Trading. Señor Objectivity.
But it’s true.
Finding the actual bottom is not a quantifiable process in real-time, which makes it a dangerous time for traders.
So in that context, based on what I’ve seen over the years, here are some things you can expect to see when a bottom is near, and you need to be on your toes.
Social and traditional media will pivot from “we’re near a bottom” to “we will never find a bottom.”
Perma-bulls go bearish, perma-bears crow that they’re shorter than ever, and pot/crypto true believers finally renounce their faith.
Morning drive time DJ’s spend the first 30 minutes of each show talking about the market.
Rumors circulate about forced liquidations, margin calls, and heavy redemptions in big hedge funds.
Regulators and politicians start grandstanding, acting as if they’re “looking out for the little guy.”
You see a ton of “Oh my God, look at (insert well-loved stock here)” tweets. Think Apple.
Shit breaks: Products, trading platforms, exchanges, and so on.
At the exact bottom, in that real-time moment, look for a massive price/volume down spike on 5-minute charts.
Some call this a “flush” but I like to call it a “puke” because people are literally “puking” out their positions, causing this action.
Watch for it.
But the real nail in the coffin for me will be when I see my charts “jump.”
Meaning long red bars appearing in the hard right-hand corner, moving so fast they re-scale all the charts simultaneously, literally “jumping” towards the bottom of the monitor.
It’s hard to describe, but it’s kind of like what Supreme Court Justice Potter Stewart said when describing his threshold test for pornography, “you’ll know it when you see it.”
Except you’ll feel it.
And it will feel like fear.
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It should go without saying - but I’ll say it anyway - all opinions expressed in The Lund Loop are my own personal opinions and don’t reflect the views of my employer, any associated entities, or other organizations I’m associated with.
Nothing written, expressed, or implied here should be looked at as investment advice or an admonition to buy, sell, or trade any security or financial instrument. As always, do your own diligence.