Opinion: U.S Indies have bottomed (for now)
Over the past two weeks, the S&P 500 has drawn down more than 5% as it broke its 50-day moving average and the volatility index has spiked above $28. The question now is, when is the pain over. From my readings, the pain ended today. The bottom is in (9/20). Here’s why I think that. Retail and the fintwit community loves to talk about things that have already been priced in. I mean how else are big players going to get liquidity? So, let me get this right. People are now all jacked up about Evergrande, AFTER a 5% correction. Big players were hedged on this situation WAY before everyone was talking about. They are now removing hedges and getting long while everyone else is getting short or putting on “protection”. Be a step ahead, not a step behind.
The daily print is extremely bullish. This pattern is pure capitulation. Remember, in order for a reversal to happen (during an uptrend) there needs to be money on the other side of the trade. Once there is enough liquidity on the short side, as longs begin to be forced out of their positions, then some big players can start to accumulate shares on the long side. If you're a big institution, and you are trying to get long, you NEED liquidity to fill your orders. Think about it, when you get a huge gap down, traders are beginning to be forced out of their positions. Once the selling continues intra-day, that is when full-out capitulation occurs. This produces great liquidity conditions for longs. Once this occurs, shorts can get caught on the wrong side of the trade and when they begin to cover when the trade goes against them it can add additional buying pressure. “The goal as a trader is to take advantage of market fear by intuitively identifying when money is trapped”. - Rande Howell
2. ELEVATED R-VOL: Volume is extremely important when it comes to market reversals. Banks, pensions funds, and hedge funds are larger players who “create” the price action. Reversals have elevated relative volume because the point of control shifts from the sellers to the buyers or vice versa. The only way to do this is for big money to come which results in elevated RVOL on the tape.
3. VIX SPIKES: If you're looking to get long amid a market reversal, volatility can play an important role in your decision making as a risk manager. Impulse moves on the $vix should be on your radar. Once an impulse move occurs, mean reversion can take place as hedges begin to be unloaded and shorts start to cover. The $vix has recently gone above $28 in which it has made its “impulse move”.