Author: SixSigmaCapital
Compiled by: Yuliya, PANews
This article aims to summarize a set of procedures for buying at stock price bottoms, detailing practical experiences and lessons learned, and establishing a sustainable framework for identification and execution. It is recommended that investors combine this strategy with other investment philosophies to gain a more comprehensive understanding of the market.
Initial Analysis and Catalyst Tracking
When a stock an investor is interested in begins to decline, close attention should be paid. Identify any upcoming catalysts, whether positive or negative. If there are no clear catalysts, it usually means the investor has more time for analysis.
At this point, the key is to figure out the reason for the stock's decline: is it a company-specific issue or an industry-wide problem? Is the price decline reasonable, or is the market over-penalizing? Is this a temporary problem, or one that fundamentally alters the original investment thesis? If the reason for the decline does not break the initial investment logic, then you can move to the next steps for a more thorough consideration of this investment opportunity.
Fundamental Due Diligence
It is essential to complete fundamental research as early as possible. The classic "4M Framework" is an effective tool, consisting of four dimensions:
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Business Model (Meaning): What business the company is specifically in.
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Moat: What competitive advantages the company possesses.
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Management: The capability and integrity of the management team.
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Margin of Safety: Whether the current stock price provides a sufficient margin of safety.
It is recommended that investors carefully review the company's financial filings and familiarize themselves with its three main financial statements (Income Statement, Balance Sheet, Cash Flow Statement). Attention should also be paid to earnings call transcripts. If using a DCF (Discounted Cash Flow) model for valuation, be sure to use conservative estimates to determine the stock's intrinsic value. This ensures that when the time comes, the investor knows clearly they are buying at a significant discount.
Incorporating Technical Analysis
Do not bottom-fish too early; patience is key. Ideally, an investor should aim to be among the last to buy the bottom. This is crucial because it allows time to study prior price action and wait for selling pressure to gradually exhaust itself. It is recommended to study charts across multiple timeframes; daily and weekly charts are good starting points.
Here are several technical analysis methods that can be used individually or in combination:
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Buying on the "right side" of a V-shaped reversal
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Waiting for the 5-period EMA (Exponential Moving Average) to cross above the 20-period EMA
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Buying at long-established support levels
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Waiting for the stock to base build after holding at least 5% above the 52-week low before initiating a tentative buy
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Buying during a "waterfall decline" (this method is higher risk)
The application of these methods is illustrated below with some case studies.
1. Buying on the "Right Side" of a V-Shaped Reversal
This is a relatively simple strategy: first, determine an ideal price you are willing to pay, then patiently wait for the stock to stop falling. When the price rebounds and rises back to that level, you can execute the trade. This is a higher-probability entry method and allows you to place a stop-loss near the recent low to protect the position.
2. Exponential Moving Average Crossover
Waiting for the 5-period EMA to cross above the 20-period EMA is a straightforward strategy. The core idea is to wait for a potential trend reversal confirmation signal before committing any capital.
Take the recent FLY trade as an example. The stock had initially caught the investor's attention, but a buy was initiated only after waiting for the 5-day EMA to cross above and hold above the 20-day EMA, entering on a pullback to test the 20-day EMA. This trade ultimately proved successful, yielding a gain of about 35% to 36% over approximately six trading days.
3. Base Building (Basing)
Waiting for a stock to hold and start building a base above its 52-week low (e.g., at least 5% above the low) is another recommended strategy. The reason is simple: investors need to see evidence that the price is likely to hold the previous low and that a trend change might be occurring.
Looking back to 2023, BABA is a good example. Although the stock had bottomed at $55 per share the previous year, an investor chose to enter in December 2023 when the price was between $68 and $70. At that time, the stock was basing, and there was a significant dislocation between price and value, with a P/E ratio of only 7. Later, the investor added to the position when the price pulled back to test the 40-week SMA (Simple Moving Average) and still holds these shares to this day.
4. Waterfall Decline
UNH is a case study for trading a "waterfall decline." This is a higher-risk setup, but the risk can be managed by combining the principle of "delayed buying" (waiting for sellers to diminish) and adding on the "right side" of the V-shaped reversal.
When UNH's stock price first declined in mid-May, it entered the investor's watchlist but was not bought immediately. The massive selling volume at the time was enough to cause hesitation. However, after completing fundamental analysis, $240 was marked from a valuation perspective as a level worth considering for a buy. When the price began to fall rapidly in August, buying operations commenced. Buys were made in batches as the price began to recover, in the range of the $230s to $240s. Finally, the position was closed out after the gap was filled in mid-October.
Another successful case of buying a waterfall decline was catching the bottom on April 7, 2025. Deep analysis was conducted throughout the weekend before executing the trade at 4 AM ET that Monday morning.
Sentiment Analysis
Tracking market sentiment is another crucial piece of the decision-making puzzle. Although it is not an exact science, there are several specific methods to incorporate it into the analysis process.
As mentioned before, it is not advisable to buy when the general public is bottom-fishing. Instead, one should look for entry points when early buyers have become frustrated and finally capitulated. An important signal is when extremely pessimistic price targets start circulating in the market, or when investors who are "all-in" on a single stock sell their positions out of despair. Typical examples include the crash Tesla experienced when its stock fell to $150 in April 2024, and the widespread belief at the time that Google was "destined to fail" in artificial intelligence.
Furthermore, waiting for analysts to lower their expectations and price targets is also an effective strategy. This process often reduces risk; once market expectations are lowered, the company only needs to achieve a small beat to potentially trigger a positive stock reaction.
Finally, if you have a following on social media, you can use them to gauge current market sentiment. For example, you can test sentiment by posting something like: "I bought UNH at $237, am I screwed?" If the post gets unusually high engagement and the replies are overwhelmingly bearish, even with some calling for prices below $100, such extreme pessimism can be seen as a good contrarian indicator.
