How to Know When a Stock Has Bottomed Out

Perhaps you have been eying a stock for a long time but just can't seem to find a good entry point. You've been waiting for weeks or maybe months for a stock to finally find a bottom, but you are never quite sure. When the stock falls and you are on the brink of buying, it seems to go still lower. Spotting a bottom in a stock can be quite difficult, and some of it does depend on luck. However, a better indication than luck is skill, and the art of finding a bottom in a stock can be learned.

Instructions

1. Look at a decent stock that has been gradually moving down. Stocks usually bottom in stages rather than in one fell swoop, never to rebound. If you see a downward trend that is caused mainly by external forces, your stock may be bottoming.

2. See if your stock moves down on bad news. If it doesn't decline anymore, then there is a good indication that it can't move any lower.

3. Check fundamentals. If the company is good, the stock is worth the investment, and the stock is probably not going low because of the stock itself. If forces are driving it down, you can more easily find the bottom when the crisis seems to be at its peak.

4. Research what analysts say about the stock. Some stocks seem irrationally hated. They may be good companies, but every analyst gives the stock a "sell" rating. While sometimes analysts are right, if you are looking at what seems to be unanimous irrational hatred, you may be able to see a bottom.

5. Pay attention to external factors. Bad market sentiment, a general economic downturn, an interest rate hike from the Fed or a general crisis can bring down good stocks. The trick is finding the nadir of the crisis, but you can be sure that the stock will go back up once external factors are over.

6. Examine the actions of mutual funds. Sometimes mutual funds all decide to dump an otherwise good stock. This can lead to a quick bottom. If you feel good about the company, view this as an opportunity.

Tips & Warnings

• Practice, Practice. It takes time to be able successfully to spot bottoms in stocks.

• Learn to love scandals. Quick scandals are often a good way to bring down otherwise excellent companies for a short enough time to buy before they are headed back up.

• Don't despair if you didn't hit a perfect bottom. If you came close, that is a good indication that you are improving your skill.