In my experience, the market always re-balances itself. Here’s the way I see the market and it’s possible paths, with a simple explanation of timing. Knowing this model can drastically improve your trading. I mean, imagine all the people who were shorting at Vix 80, Vix 60, Vix 50! Pretty soon I will post something saying, “Imagine all the people getting long in Vix 35” … hehe. It really is your job to figure out the definition of “re-balanced”, and the timing of it. Again, understand the psychology behind it all.
Given our current state of market: Low volume rally off of November lows, excluding quadruple witching day; Vix reversal to the 200 day moving average; massive relief rallies.
- Market sells off on low volume = bullish; this increases the timing for bulls. Think of the decline in your longs as “the price to pay for a bigger rally.” It really isn’t something worth dumping all your longs for!
- Market sells off on high volume = bearish; this shifts the momentum to the bears
- Market moves up on low volume = bearish; this increases the “speed/velociy” of the next selloff (See my “Sisyphean Rally” theory)
- Market moves up on high volume = bullish; probability for extended rally increases with a “follow-through-day”. However, this also “re-sets” a lot of other technical indicators. For example, our perception of volume changes.
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