Alternate name: Market bottom, rounding bottom
Consider this example. Stock A’s price has been falling for two consecutive months. Sellers are attempting to sell their shares but there is no demand—the sellers outnumber the buyers. During the third month, there is renewed demand for the stock. Now, buyers are actively purchasing Stock A and driving up its price. The lowest price before Stock A rebounded was $25; this is the bottom price.
How Does a Stock Bottom Work?
A stock bottom represents more than the falling prices or the lowest traded price on a security. “Just because prices stop falling doesn’t mean a bottom is in. A bottom is the reversal of a bearish trend,” David Russell, vice president of market intelligence at TradeStation Group, told The Balance in an email,. A bottom formation is affected by supply and demand. Specifically, it looks at the relationship between buyers and sellers. “At any moment in time there are always buyers and sellers.” Russell said. “Price is a balance between the two, and changes when one group exceeds the other.” For this reason, reduced demand and falling prices do not solely characterize a bottom formation. “Simply running out of sellers doesn’t represent a bottom,” Russell said. “Some stocks fall without bouncing, sit for a few months and then continue falling. A bottom requires the entry of new buyers.” The influx of new investors that contributes to the rebound in the stock’s price completes the bottom formation. As demand for the stock goes up, so does the stock price. “All the old owners of a stock who don’t like it anymore have already sold," Russell said. “Meanwhile, a new group of investors who like the stock begins to enter.” The bottom price often signals a stock’s recovery, Russell said. “Stocks usually bottom before the good news officially arrives,” he said. “For example, the S&P 500 turned higher in March 2009 and March 2020. Both times were more than a month before the recessions ended.” For this reason, some economists may use stock bottoms to assess future business conditions. Similar to single bottoms, double bottoms depict a stock’s downtrend, followed by the beginning of a potential uptrend. Russell provided Netflix as a recent example of a double bottom: the company had a double bottom around $478.50 on May 11 and May 19, 2021.
What It Means for Individual Investors
“Stock bottoms can be major opportunities for investors, with benefits far exceeding risk,” Russell said. “Correctly finding bottoms can sharply increase the odds of making money. But it’s not easy.” Be mindful of the time-cost opportunity when waiting for a bottomed stock to rally, too, Russell noted. “The biggest problem with targeting stocks that have bottomed is that they seldom go straight up,” Russell said. “More often than not, they drift and investors waste time and money. Investing is not always a question of finding value or bargains. It can be more useful to focus on real growth.”
