The Anatomy of a Flash Crash: 3 Signs the Bottom is In

The Psychology of Panic

When the market collapses, rational analysis is often the first casualty. In the heat of a 20% drawdown, the human brain is wired to extrapolate the decline to zero. This is the recency bias in action—a cognitive glitch that makes the immediate past feel like the permanent future.

But for the disciplined investor, panic is not a signal to sell; it is a signal to investigate.

"The stock market is a device for transferring money from the impatient to the patient." — Warren Buffett

At Market Memory, we analyze thousands of historical volatility events to identify the structural markers of a market bottom. We call this "Financial Forensics."

1. Volume Capitulation (The "Puke" Point)

The first and most reliable sign of a durable bottom is volume capitulation. This occurs when the last of the "weak hands" finally exit their positions, usually at a significant loss.

What to look for:

• Volume Spikes: Volume should be 3x-5x the 30-day average.
• Price Action: A massive intraday range where the stock closes near its highs (a "hammer" candle) or simply refuses to go lower despite bad news.

When everyone who wants to sell has finally sold, the path of least resistance flips to the upside.

2. The Divergence Signal

A "divergence" happens when the price makes a new low, but the underlying momentum indicators (like RSI or MACD) make a higher low. This indicates that the selling pressure is exhausting itself.

In our dataset of 50+ major crashes, 80% of V-shaped recoveries were preceded by a bullish divergence on the daily timeframe.

3. Institutional Accumulation

While retail investors are panic selling, institutions are often quietly accumulating shares. This leaves a footprint in the data known as "Dark Pool" activity or simply abnormal stability in the face of broader market weakness.

Case Study: The 2020 Covid Crash

The March 2020 crash was the fastest bear market in history. Yet, the signs of a bottom were present for those who knew where to look.

• Extreme Fear: The CNN Fear & Greed Index hit single digits.
• Fed Intervention: A massive liquidity injection provided the "floor."
• Volume Explosion: The capitulation volume on March 23, 2020, was historic.

Conclusion

Catching a falling knife is dangerous, but waiting for the dust to settle is expensive. By identifying these three signs—Volume Capitulation, Divergence, and Institutional Accumulation—you can shift your probability of success from a gamble to a calculated risk.

Data sources: Market Memory Historical Archive, AlphaVantage.