As a trader and investor, I always find volatile markets the most interesting and rewarding. Rewarding because they offer opportunities in all markets with risk and sentiment flowing globally, and secondly interesting as it is at such times that the media frenzy takes hold, as pundits emerge to pronounce on bizarre market correlations, whilst simultaneously forecasting that the end is nigh. The problem for many technical traders, at such times, is that many traditional approaches simply fail, and as always they are left floundering for ideas to help them make sense of the carnage unfolding before their eyes.
For volume traders however, all is calm and serene, and the reason is simple. If the market is selling on high volume, then the move lower is confirmed, and it’s safe to join. We are not chasing price, but merely joining the insiders as they drive the market lower. Equally in any short cover rally higher, if the volume is falling, then clearly we have not reached the floor, so any intraday trading is best restricted to a short time horizon. Finally, as we reach the climax of the price waterfall, stopping volume arrives, giving us a clear signal that the move lower is coming to a pause, and likely to move into a congestion phase. This in a nutshell has been the price action since the start of the year for US equities in particular, with stopping volume self evident on the 20th January as the YM index closed on the daily chart with extreme volume and very deep wick to the lower body of the candle. The first signal that the trend lower was coming to an end, and heralding the prospect of a congestion phase to follow developing and the expectation of further buying to come at this price area.
But what other indicators can we use to provide guidance as to the severity and extent of the current turmoil? And perhaps there is none other than the VIX, the ultimate barometer of fear. A glance at the chart for the VIX reveals all, and the question to ask is, does this chart reflect panic and fear? And to answer my own question, I would suggest not.
Consider the monthly chart for context; over the last few weeks we have seen the index rise to a paltry 26.81 (far below the level recorded in August last year when the index touched a high of 53.29). Scroll back further to 2008, as the financial crisis unfolded and we see a level of 89.53 being achieved. So the first step is simply to get a grip. This is not calamitous, it is not a market rout, and given the response on the VIX, which has been muted to say the least, barely comparablere to last years spike higher in the summer. And, as my dear late mother would have quoted from an old Italian saying…it’s plenty of smoke but no roast! Which is precisely what it is. A correction – yes – but that’s all it is, and once the waters have calmed, markets will return to retest the highs of last year with the insiders and market makers once again taking full advantage of any news to shake the weak hands out, and garner some more stock for a rally higher once again. And indeed, you can be assured that once such news hits the retail press, as we saw with RBS (Royal Bank of Scotland) here in the UK advising their clients to sell everything, you can be assured of one thing… we are reaching the bottom and it;s time to buy!
As the venerable Buffet has often said : Be fearful when others are greedy, and greedy when others are fearful!
By Anna Coulling
Charts from NinjaTrader and indicators from Quantum Trading