Recognizing Market Tops and Bottoms

5 Ways to Spot Market Tops and Bottoms


To be successful in the stock market, Investors should always be looking at the big picture: is the market in an uptrend or a downtrend? Bull and bear markets are broad ways of signaling if it’s a good time or a risky time to buy stocks.

But what about other indicators that flag when the market has peaked or is ready to rebound?

You have to know the signs that a change is imminent. The market direction itself is the primary indicator, but there are 5 psychological market indicators that give you an added edge. These signs have historically been good predictors of when a correction will end or a market may be topping.

Watch these indicators, and if several begin to flash signals that a top or bottom is near, prepare your portfolio accordingly.

  1. VIX

    VIX estimates expected volatility based on S&P 500 option prices. When fear rules Wall Street, volatility surges in the stock market, which is typically the time the major indexes will hit bottom and rally higher.

    TIP: Look for the VIX to rise more than 20% above its 10-day moving average, which can confirm a positive reversal.

  2. High-Low Ratio

    High-Low Ratio looks at the ratio of the new price highs to new price lows. It can flag rebounds from intermediate corrections during bull markets.

    TIP: When the indicator shows its first up day after crossing below 0.5, look for a short-term bottom in an intermediate correction during a bull market.

  3. Margin Debt

    Margin Debt is the amount borrowed when buying on margin. Essentially, a trader is paying for part of the asset with their own money and borrowing the other part from the broker. Keep an eye on year-over-year percentage change in total margin debt—it can flag major tops in bull markets.

    TIP: Margin Debt will exceed 55% when optimism runs rampant on Wall Street and investors are borrowing heavily during the late stages of a bull market.

  4. Put-Call Ratio

    Put-Call Ratio compares the total number of put options (bearish outlook) traded each day with the total number of call options (bullish outlook). It helps determine major and short-term market bottoms.

    TIP: The ratio will surge above 1.0 when investors turn bearish and buy more puts than calls. A reading above 1.15 can confirm a positive reversal in the S&P 500 or Nasdaq.

  5. Bulls vs. Bears

    Bulls vs. Bears is a weekly survey of newsletter writers published by Investors Intelligence.

    TIP: When the percentage of bears crosses above the bulls, a market bottom is more likely.

See also

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