This pattern is easy to recognize. Along with topping patterns, bottoming patterns form at market extremes, are usually associated with divergences of trend-following indicators, and occasionally accompany exhaustive moves.
The following is a list of the basic elements of bottom patterns:
Figure 8.2 illustrates the technical formation of this pattern in the SPY, an electronically traded fund of the S&P 500 Index.
SPY, daily, indicator set #8. • A sharp sell-off (A–B). • A low point reached with prices far below the moving averages (area B). • A bounce to the value zone that doesn't hold (area C). • Prices drop to a new low (area D) as the MACD lines and histogram put in a higher low. • Prices recover to the 50-day EMA (area E) ...