How I Bottom Fish Stocks

“You do not rise to the level of your goals. You fall to the level of your systems.”
– James Clear

This quote is the whole point.

Bottom fishing can work, but only when it’s treated like a system.

A repeatable checklist. Something measurable.

Something you can review, refine, and improve over time.

I’m still a trend follower at heart.

I prefer buying strength and buying pullbacks in strength.

But bottom fishing is a complementary tool.

It helps me identify laggards that can catch up when the market environment is supportive and rotation starts showing up under the surface.

Let’s get into it.

Bottom fishing is not a default setting. It’s a conditional strategy.

If the broader tape is hostile, most “cheap” stocks just get cheaper.

So before I even look at divergences or failed breakdowns, I start with the market regime.

This is the foundational chart.

The top panel is SPY trending higher, but the bottom panel is the real tell, participation.

When the percentage of S&P 500 members above their 200-day starts breaking out and moving through that higher participation zone, it’s telling you the market is broadening out.

In plain English, breadth is improving.

That matters because it furthers the posture of being opportunistic.

It also frames the “why” behind bottom fishing in Bull Markets.

When participation is expanding, the rising tide is doing more of the work, and laggards have a better chance of mean reverting.

Key takeaway: A breadth breakout creates the opportunity set. This is where “time to be opportunistic” comes from, not from a story about one stock.

Stocks have to stop going down before they can start going up.

Momentum helps you quantify that transition….

The classic tell is: Price makes a lower low and RSI makes a higher low.

That does not mean buyers are in control. It usually means sellers are exhausted.

Price is still falling, but it’s falling more slowly.

That is the early clue that the pressure is changing.

XRT retail momentum divergence and follow through:
This is a clean example of the process working in real time.

At the moment of the call, XRT was making a lower low in price while RSI was putting in a higher low.

That was the alert, not the signal.

The signal came later as price stabilized, reclaimed key levels, and ultimately followed through, to the point that XRT went on to make new highs.

This is also where the coaching point matters.

Bottom fishing is not strictly “52-week low hunting.”

It’s a process about recognizing a change in behavior, then waiting for price to confirm it.

XHB and ITB Homebuilders and Home construction bottom fishing:

The homebuilder setup is a second example of the same momentum concept.

You can see the RSI higher low developing while price had been under pressure.

That divergence signaled seller exhaustion.

Then price stopped going down, went sideways, and eventually rotated higher.

This is exactly how these moves often develop.

They rarely reverse in a straight line. They tend to give you time.

Key takeaway: momentum divergence is the early warning that the down move is losing force. But the trade still needs confirmation.

This is where most people get the sequencing wrong.

They treat the divergence as the entry signal. I do not.

For me, the signal is the follow through after the failed move.

A failed breakdown, the “oops” pattern, typically looks like this:

• Price breaks a key level

• Panic selling shows up

• The breakdown fails quickly

• Price snaps back, then follows through

Failed moves can lead to fast moves because supply dries up.

Once sellers are done, the market does not need much demand to lift price.

LIT lithium ETF failed breakdown and follow through:

LIT is a clean case study.

After a long downtrend, the chart starts showing a meaningful shift, RSI not getting oversold, then a reclaim of a key level, then the “peek-a-boo” moment where price pushes through and holds.

From there, follow through did the heavy lifting.

The point is not that every move will look identical.

The point is that the sequencing, exhaustion then failure then follow through, is a repeatable framework.

Key takeaway: the divergence sets the stage, but the failed breakdown and follow through is the confirmation.

This is the most important step, and it is the part most people skip.

If you can’t define risk, you don’t have a trade. You have an opinion.

I treat each setup like a poker hand. You do not need certainty. You need defined downside, and a setup where the potential payout justifies the bet. This is also where journaling and measurement matter. If you track the risk/reward and the outcomes, you can actually improve your process over time.

Here are a few current examples that fit the “clean risk, defined levels” lens.

$ORLY O’Reilly Auto:

ORLY is a good illustration of why bottom fishing requires discipline.

Price has been below the 200-day, so the first job is not to predict, it’s to define.

The chart shows an attempt to stabilize after a failed breakdown area, with RSI improving and pushing toward that “RSI 50 as support” behavior that often shows up when downtrends start transitioning.

The takeaway is not that it must work, it’s that the levels are clear.

If it cannot reclaim and hold the key areas, you know exactly where you are wrong.

$XLE versus $SPY relative strength:

This is the same bottom fishing framework applied to relative strength, not just absolute price.

Energy has been in a long relative downtrend versus the S&P 500, but the chart shows RSI trying to lift and “peek-a-boo” above the range, which can be an early sign of seller exhaustion on a relative basis.

This is not a declaration that energy is now leadership.

It’s simply a way to monitor rotation risk and opportunity with a structured lens.

$FAST Fastenal:

FAST is a clean “catch-up” style candidate, where industrials have been strong broadly, but this name has lagged and is trying to reassert itself.

The chart shows RSI improving off a higher low and price pushing through levels that create a well-defined line in the sand.

That is what I want, a setup where I can quantify risk, and where follow through can turn a trade into a trend.

Two execution notes that matter here:

• Know where you’re out. Define the invalidation level before you enter.

• Consider time stops. Some bottoms do not become trends. If it does not act right within a reasonable window, it is often better to step aside and wait for the next clean setup.

Key takeaway: bottom fishing is not about being right. It is about risk being well-defined.

Bottom fishing is a tactic, not an identity.

It works best when it is deployed inside a supportive market regime, when breadth is improving, and when you let price confirm the shift.

1.) Start with the regime.

2.) Look for momentum exhaustion.

3.) Wait for the failed breakdown and follow through.

4.) Then quantify the trade with clean risk and clear exits.

Markets don’t reward ambition or conviction. They reward discipline and structure.

Build the system first. The trades take care of themselves.

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Larry Thompson, CMT CPA

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