S&P 500: Double Bottom, or Lower Lows Ahead?

Justin Nugent

This article was last updated on 09/28/2022.

The collective of stock market participants have been watching with bated breath to see what would happen when the S&P 500 reached its June low. It’s a level that we’ve talked about several times. Now we’ve arrived. If futures hold up, we’re looking at a nice bounce today. The question on everyone’s mind: Will it hold? And if so: Could this finally be the end of the 2022 bear market? The answer is a little more complicated than simply drawing a line at the double bottom. For instance, while the S&P 500 never made it below the 52 week low (3,636.87), it did set a new “lowest close” of the year (3,655.04), 11 points lower than the June low close of 3,666.77. And some argue that under the surface, substantial damage has already been done to the most important stocks in the market. 

Many Stocks Have Already Broken Their “June Low” — Setting New 52 Week Lows in the Process

A closer look at the names that haven’t set new 52 week lows recently reveals additional information about where the relative strength lies:

  • Energy (despite getting hammered over the past few months) is still well above its 52 week lows. 
  • Healthcare is also a strong performer. 
    • The largest market cap names in both the energy and the healthcare sector seemingly avoided a “June low” moment. 
  • Consumer staples like PG and WMT set their 52 week low more recently, but still have avoided breaking any new ground since then. 
  • Three big-tech generals — Amazon, Apple, and poster-child for the growth trade, Tesla — are all more than 10% above their 52 week lows. 
  • The same can’t be said of ad-sensitive GOOG and META, or the consumer-sensitive V and MA. 

It isn’t just individual stocks that have charted a course for new lows this week. It’s also the DIA (SPDR Dow Jones Industrial Average ETF Trust), the VTI (Vanguard Total Stock Market Index Fund ETF), the RSP (Invesco Equal Weight S&P 500 ETF). All three set new lows on September 26th, 2022.

Does it Matter if Stocks Set a New 52 Week Low?

Not necessarily. After all, every “52 week low” will eventually become a bottom. However, on the way to that bottom, there may be an endless amount of “new lows” before the bulls collectively decide to draw that line in the sand. That’s why it’s called “catching a falling knife” — it’s dangerous to blindly buy dips when you aren’t armed with additional catalysts. That’s where technical analysis comes in. When technicians (and more importantly, algorithms trained to trade on technical analysis) spot bullish reversal patterns like double bottoms, it can feel a little less like catching a falling knife. Double bottoms indicate that bulls have taken a stand, and said, “This security should not trade below this line.” 

Double bottoms (and trend reversals in general) are most reliable when accompanied by high volume. You’ll want to see a swarm of buyers coming in now that the price has reached a “buyable” level. If volume is still tepid, it could mean that there aren’t enough buyers to turn the tide just yet. It’s always possible that those buyers come in on the third retest of the low — forming a triple bottom. Just like they sound, triple bottoms are even more reliable than double bottoms. However, in order for bulls to prove they really mean it, these bullish reversal patterns still require high volume to be fully trusted. 

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VIX, Put/Call Ratio, RSI: Hunting for Capitulation

When hunting for bottoms, buyers also like to see signs of capitulation. Oversold signals can help separate buyable bottoms from dead cat bounces. 

In this case, we identified a high put/call ratio, above average VIX, and an oversold RSI as additional capitulatory factors. As a rule, a high put/call ratio is typically anything over 0.7, an oversold RSI is typically anything under 30, and an overbought VIX is typically anything above 30. However, these aren’t hard and fast rules. To make accurate judgements, buyers will want to utilize the charts to determine how current metrics stack up against the historical data.

VIX

In the case of the VIX, over the last 253 closes, only 13 were higher than September 26th’s close of 32.26. In other words, the VIX has only been higher 5% of the time over the past year.

double bottom
1Y VIX, Source: Ycharts

Equity Put/Call Ratio

On September 26th, the equity put/call ratio came in at 0.80. And on the preceding Friday, the equity put call ratio clocked in at a whopping 1.02! The put/call ratio hasn’t been higher than 1.02 since March 16th, 2020 — the early days of the Covid-19 crash. Over the past year, the equity put/call ratio has only been higher than 0.8 12 times — similar to the VIX figure above! 

June low
1Y P/C, Source: Ycharts

RSI

Over the past year, the 14-day RSI on the SPY ETF has only dipped into oversold sub-30 territory for one other stretch. Following that short period, SPY rallied 6.05% measured from close to close over the course of 4 trading days.

June lows
1Y SPY + RSI, Source: TradingView

The Bottom Line: When To Pull the Trigger on a Trade

When presented with conflicting evidence from both sides of the trade, you become the judge. A good trader remains impartial, refusing to let their bullish or bearish biases cloud their judgment. The easiest way to do that is to be patient. For traders who see the new 52-week lows from half of the top 20 largest stocks, the DJIA, the VTI and the equal weight S&P 500 as too much internal damage for the market to bare, it’s best to wait for a cooling of the RSI & the VIX, and an unwinding of the put/call ratio. It doesn’t have to come down to average levels, but in all three metrics it’s unlikely to continue running this hot. And for traders who see these oversold metrics lining up with a potential double bottom as a sign of a buyable dip, you’ll want to see above-average volume as a sign that bulls are here to stay. Otherwise, this could just be a short-lived dead-cat bounce.

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