The four tools I use to find bottoms

You need four tools. Moving averages, RSI, Fibonacci and Elliott Wave.

None of them work well alone. Stacked together they give you a thesis instead of a guess. Here is how I use each one, and how I combine them.

Moving averages

I only use the 50 and 200. Daily, weekly, monthly.

They show the average price over that period. The longer the period, the stronger the level and the more attention it deserves. A 200 week moving average carries far more weight than a 50 day.

One thing most people miss: moving averages cut both ways. They act as resistance when price sits below them and support when price sits above. The flip from one to the other is where the money is.

RDW is a textbook example of that flip.

Price broke above the 200 WMA on rising buying volume. Then a low volume retest. Then volume returned on the bounce. Price rallied 127% in weeks and over 300% for anyone who held another five months.

The process is the same on any chart:

1. Price breaks above resistance or a moving average
2. Wait for a low volume retest
3. Price bounces off that level with increased volume
4. Buy, then size in as price shows strength

Strength means bullish candles at the level (engulfing, hammer), reclaiming the shorter term averages (9 EMA, 21 EMA, 50 DMA), and volume continuing to build.

The retest does not always come. But your odds are far better waiting for a confirmed retest than chasing the initial breakout. When I am confident and the confluences are stacking, I will take a small starter on the breakout and add heavily on the retest.

BABA shows the other half of this.

Price traded above the 200 DMA and retested it several times. A substantial move followed on every touch. The more times a support level is tested and holds, the stronger it gets. Same applies to resistance.

Where you are wrong: a decisive close back below the moving average on volume. If price retests the level and then rejects it again with increased selling volume. Cut it and wait for the next one.

RSI

Above 70 is overbought. Below 30 is oversold. That is not why I use it.

A stock can sit oversold for years. Traders who buy purely because RSI printed 28 get run over. What I want is divergence.

Bullish divergence: price makes lower lows, RSI makes higher lows. Sellers are pushing price down but with less force each time.

Bearish divergence: price makes higher highs, RSI makes lower highs. Buyers are still lifting price but running out of fuel.

HIMS ran the bullish version cleanly.

Price kept grinding to lower lows while RSI printed a rising series of lows underneath. The move that followed was not a coincidence.

For short term moves I watch the 4 hour and daily. For a long term position, the higher the timeframe the better. Divergence on a weekly chart is worth ten times divergence on a 4 hour.

What I want on an oversold stock:

• RSI near or below 30
• Price making lower lows while RSI makes higher lows
• The same divergence showing on more than one timeframe
• All of it landing at a break and retest of a moving average

Invert every line above for an overbought stock.

Where you are wrong: price breaks to a new low and RSI breaks its own prior low with it. The divergence is gone. There is no setup left to trade.

Fibonacci and Elliott Wave

Fibonacci is my favourite tool on the list, and it is not confined to charts.

Take a sunflower. Count the spirals in the seed head one way, then the other. You get two consecutive Fibonacci numbers, usually 34 and 55. Not "it looks spirally." An actual number you can check, and it comes out right.

The same ratios show up in markets. But drawing fibs on random points is useless. You need to know which swing to measure. That is what Elliott Wave gives you.

Waves 2 and 4 are the corrective legs. They are where you want to be buying.

Wave 2: draw the retracement from the wave 1 low to the wave 1 high. Watch the 0.618 and 0.786 Fib.

INDI pulled back and tagged the 0.786 before rallying 120% in a month. Around 90% of my wave 2 buys sit between the 0.618 and the 0.786 Fibs.

Wave 4: draw the retracement from the wave 2 low to the wave 3 high. Watch the 0.382 and 0.5 Fib.

MOH bounced off the 0.382 Fib in May and June before rallying 39% in six weeks.

Where you are wrong: wave 2 cannot trade below the wave 1 low. If it does, your count is broken and the trade is dead, whatever the fib says. For wave 4, price should not overlap the wave 1 high. Both give you a hard invalidation before you enter, which is the whole reason I count waves in the first place.

I will break the wave structure down properly in a future issue.

Combining them

Any one of these is fine on its own. Together they give you a reason to hold when the position moves against you for a week.

The best setup I can get looks like this:

1. Price has pulled back in three waves from wave 1 on falling volume
2. Price is sitting at the 0.618 and the 200 WMA at the same time
3. RSI is oversold and showing bullish divergence on multiple timeframes
4. Price bounces off that zone on rising volume and reclaims the short term averages
5. Buy. Wave 3 begins.

That setup does not appear often. When it does, I size up.

Where the order actually goes

I do not buy at the level. I buy the reaction to it.

Price arriving at the 0.618 and the 200 WMA is not a signal. It is an area to watch. The signal is what price does when it gets there: a bullish candle at the level, the short term averages reclaimed, volume returning on the bounce.

When the confluences are stacking I will take a small starter as price reaches the zone, then add heavily once the reaction confirms. If the reaction never comes, the starter is a small loss and I move on. If it does come, I am already positioned and adding into strength rather than chasing.

That is the whole difference between a level and a trade.

The checklist

Before I buy, I run through this. The more that stack, the bigger my size and conviction.

Structure

• Is price in wave 2 or wave 4?
• Has price pulled back in three waves?
• Is price respecting the relevant Fibonacci levels?
• Is a retracement meeting an extension? (0.618 retrace of one move sitting on the 1.618 extension of another)

Momentum

• Is RSI oversold?
• Is RSI showing bullish divergence?
• Is that divergence showing on multiple timeframes?
• MACD bullish cross at the level?

Levels

• Is price approaching a major moving average? The longer the period, the stronger.
• Is price at a previous structural high or low that has acted as support before? The more touches, the better.
• Is there trendline support?
• Is price at the base of a channel it has been respecting?

Volume

• Capitulation spike into the low, a selling climax?
• Volume drying up into support, sellers exhausted?
• Volume returning on the bounce?

None of this makes a trade certain. It stacks probability, and it tells you exactly where you are wrong before you put money on the line. That second part matters more than the first.

Your turn

This is email two. Tell me what you want in email three. Most requested topic wins.

Drop a direct reply or a comment under any post with suggestions.

Missed the first one? It's here: https://echoanalysis.kit.com/​

Still here?

Most people don't get this far. That tells me something about you.

So here's something I haven't said anywhere else.

Later this year I'm running one cohort of 1-1 tutoring. Three people. You learn to read a chart the way I read one.

It's the premium end. Priced accordingly, and there's homework every week.

There's no launch post coming. No thread, no announcement. Just this line, to the people who read to the bottom.

If you're interested, reply.

Echo Analysis

Everything above is my own analysis and my own positioning. It is not financial advice and it is not a recommendation to buy or sell anything. Do your own research and manage your own risk.