Primer: Using Moving Averages to Find Market Bottoms

A Short Guide To Navigate Crashes, Bear Markets, and Oversold Sectors

The Indicator That Keeps Finding the Bottom

Let’s start with the one that has been the most consistent in my own work: SKTH, which tracks the percentage of S&P 500 Information Technology stocks trading below their 200-day moving average.

The 200DMA is the gold standard for trend definition. When a stock is below it, it’s in a long-term downtrend by most definitions. When the majority of an entire sector is below it, you’re looking at capitulation-level selling — the kind that historically precedes meaningful recoveries.

Here’s the track record:

Four distinct macro events. Four different catalysts. One indicator that consistently identified the inflection point. That's the kind of signal worth building a process around

Small Caps: Where RSI Really Breaks Down

If there’s one area where relying on RSI alone will consistently hurt you, it’s small caps. The Russell 2000 ($IWM / $RUT) is inherently more volatile than large caps — individual names swing wider, liquidity thins out faster, and the index can stay technically oversold for extended periods during risk-off episodes.

The fix is straightforward: instead of looking at price-based momentum like RSI, look at what percentage of small-cap stocks are trading below their 50-day moving average. The 50DMA is the right lens here because small caps move faster — the 200DMA often lags too much to give timely signals in this space.

When the breadth reading reaches extremes — say, 70-80%+ of $IWM components below the 50DMA — you’re approaching the territory where the risk/reward for longer-term swing entries becomes compelling. Not because every stock is about to rocket, but because the conditions for a mean reversion across the index are in place.

This single adjustment to your small-cap process can meaningfully improve your entry timing and help you avoid the painful experience of buying what looks cheap — only to buy it cheaper again two weeks later.

It Works Across Every Sector

Here’s where this framework becomes particularly powerful: every major sector has its own breadth indicator, and they’re all available natively in TradingView.

Whether you’re trading Healthcare, Financials, Energy, or Tech, you can pull up the % of stocks below their key moving average for that sector and use it to calibrate how stretched the selling really is. A sector-specific reading gives you context that a broad market indicator can’t — because different sectors often bottom at different times during a correction.

Each of these sectors has periods where it leads or lags the broader market. By tracking breadth at the sector level, you can identify which pockets of the market are reaching washout conditions — even when the headline index still looks relatively healthy.

How to Use This in Practice

Here’s a simple, repeatable process for incorporating these indicators into your market analysis:

The Bottom Line

Chasing waterfalls — buying into steep drops hoping to call the bottom — is one of the most expensive habits in trading. The instinct to buy cheap is sound. The execution, without context, is where traders get hurt.

Market breadth indicators built around moving averages give you that context. They answer the question RSI can’t: not just is this oversold, but how does this compare to every other time the market has sold off? When the answer is “this is historically extreme,” the risk/reward for patient, conviction-based entries shifts dramatically in your favor.

The 2018 Christmas Crash. COVID. The 2022 Bear Market. The 2025 Tariff Tantrum. The signal has been there each time. The question is whether you’re watching for it.

Get These Indicators Every Week

I track market breadth readings across all major sectors and share them with members each week — along with trade setups, macro context, and options flow analysis.