Bearish Sentiment

The Bad News Signal is bullish, emerging from a bearish sentiment extreme. A bullish Point & Figure set-up coined by the late Mike Burke, Chartcraft, pioneers of sentiment analysis. The buy signal involves consideration of both market sentiment plus Point & Figure charts. The China-US trade war is a present working example of this signal at the macro level.

Buy Signal Explained

This positive signal develops when bad news, relevant to a stock or market, is released following an extended sell-off. However, despite the bad news, the stock rises, much to the surprise of traders. Bearish sentiment is prolific and few see logic in buying given the negative news. A Point & Figure buy signal prints, a move that the majority are ill prepared off. High short interest is often evident, another indication of the bearish sentiment situation. The market price rises, confounding the bearish majority. The reason for the rise? Everyone who was prepared to sell has already done so. Consequently, supply dries up, and demand causes the price rise. That triggers a domino effect via a short-squeeze.

The Mike Burke Chartcraft trading technique

Bad news could be a disaster. Basically, any event that creates negative sentiment. Mike Burke Chartcraft, would reference the Bhohpal disaster from 1984 and the subsequent rally by Union Carbide. It may also present as a profit warning or earnings miss. Basically any event that shocks the market in a bad way.

Mike Burke (Chartcraft) would look for the signal in a bear market, at the stock level, as very often that is when companies throw out their dirty-laundry.  Stocks that rally on bad news, during a bear market, stand a good chance of being the next bull market leaders. In the present day and age, with instant reactions due to fast news distribution, the signal can cause spectacular intraday reversals.

Illustratiom of how to trade bearish sentiment .
Bad News Signal on a Chart

On a Point & Figure chart the set-up begins with a deep uninterrupted down O column. That column reverses abruptly from either, a long-term support shelf, rising trendline or key moving average. Bear Traps across those levels are particularly desirable. Ultimately, it is a subsequent P&F buy signal that confirms Mike Burkes Chartcraft Bad News Signal. A buy signal could be anything from a simple Double Top breakout to our 3SR. Remember, an essential ingredient accompanying the buy signal is bearish sentiment. Without negative market sentiment, there is no signal!

As instances of the bad news signal appear in the market, they will be reported in our daily research.

How to Trade Bearish Sentiment?

Imperative to identify bearish sentiment with the Bad News signal. For a more in-depth explanation of analyzing sentiment, visit our contrarian page.

Execute the trade on the first Point & Figure buy signal following the bad news story. The Wall Street adage buy when there is blood on the streets applies.

Adding significance to the signal is the presence of support at the nadir, either horizontal or trendline. A Bear Trap or Low Pole across either of those levels also adds conviction to the set up.

Failure Potential?

The bad news signal is one of the more speculative set-ups. Be prepared for quick stop execution should further bad news hit and cause fresh weakness. Mike Burke Charcraft advised small position sizes to counter that threat. Definitely, never put all your eggs in one basket!

Where to place a stop-loss?

One box beneath the low for the O column formed when the bad news, in the public's eye, was at its severest.

How to determine a price target?

A upside objective from this signal is difficult since each case will be unique. However, the upside potential for these trades is often large, at least above where the price was trading at ahead of the news event. Why? Shorts are likely to ride losses up to that point. If a new bull market results from the signal, fresh targets can be calculated as subsequent P&F buy signals print. A bearish sentiment condition often takes time to work off. A reversal in market sentiment in itself, could be used to gauge the expiry of a recovery.

Case Studies of Buying Poor Market Sentiment

The earnings miss opportunity

Facebook saw a surprise earnings miss in July 2018. The Facebook price crash wiped $119 billion off its market cap in one session alone! High short interest accrued on the day of the news, a sure sign that bearish sentiment jumped. However, the price collapse proved to be a great buying opportunity, as a short-squeeze emerged, resulting in a rapid recovery.

Facebook price crash on bearish sentiment
Geopolitics and bearish Sentiment

The China-US trade war triggered a market sell-off into the end of 2018. Bearish sentiment late December led to a strong bad news buy signal. On January 2nd 2019 Investors Intelligence reported a bearish advisor reading of 34.6%. The market duly commenced a relentless recovery, hitting record highs fours months later. On the chart, a 3SR is labelled, further supporting evidence of the turnaround.

Case Study of Bearish Sentiment extreme in December 2018

Point & Figure charts for U.S. indexes also revealed bad news signal evidence during the China-US trade war.  Overextended down columns into the end of 2018 appeared across markets.

China US Trade War Bearish Sentiment Chart

Further evidence of a bad news signal situation at the end of 2018 was the bearish sentiment reading on our own ContraGauge. Fear was implied by the reading nearing 100 degrees. Readings on our indicator range from 0 to 360 degrees. The video below explains how the ContraGauge can be utilized for successful market timing.

ContraGauge Bearish Sentiment Extreme

Inverse to the bad news signal is a good news signal. Needless to say, as opposed to buying bearish sentiment, the great news signal involves selling into bullish sentiment.

Next up in our buy signal educational series is the popular Low Pole pattern.