Volatility Trading & Stock Market Trends

Volatility Trading: Harnessing Market Fluctuations

Updated Jan 12, 2024

Volatility Index readings have surged to a new high (as shown in the header image above), meaning extreme behaviour in all areas can be expected in and out of the markets. Furthermore, we’ve incorporated fresh psychological data points into the V-Indicator. We anticipate that these new highs, along with subsequent peaks, will align with increased levels of market manipulation. These additions offer early warning signals, indicating the potential for market manipulation to influence upward or downward movements. Historical instances, such as the impact of COVID, the significant correction starting in late 2021 and concluding in October 2022, as well as the dot-com crash, underscore the relevance of these psychological data points in understanding market dynamics.

Volatility trading is a strategy that revolves around buying and selling options based on the level and predicted future direction of implied volatility (IV). It’s a method that can be particularly effective during market instability, allowing traders to capitalize on the extreme price movements that often accompany such times.

Historical Examples of Volatility Trading

Dot-com Crash: The dot-com crash of the early 2000s provides a prime example of volatility trading. As the tech bubble burst, implied volatility soared, creating opportunities for savvy traders. Those who could accurately predict the market’s direction could have profited from the extreme price swings that characterized this period.

2021-2022 Market Correction: The market correction that began in late 2021 and ended in October 2022 is another instance where volatility trading could have been beneficial. During this period, the market experienced a slow, grinding correction, with many top-tier companies seeing their stock prices fall significantly. This allowed traders to buy these stocks at a discount when volatility spiked, and panic selling ensued.

Companies like AMD, QCOM, INTC, NVDA, and TSM saw their stock prices drop dramatically, presenting a golden opportunity for those who had prepared a list of such high-quality companies to invest in. By combining volatility trading with mass psychology and technical analysis, traders could identify the optimal time to buy these stocks.

The Power of Volatility Trading

Volatility trading is not just about profiting from market instability; it’s also about managing risk. When markets are volatile, prices can swing wildly in either direction, creating both opportunities for profit and potential for loss. By leveraging options to leverage volatility, traders can take advantage of these price swings while hedging their existing positions against severe losses.

While volatility can be intimidating, it’s a normal market cycle. The stock market is mostly reasonably calm, with relatively brief periods of above-average market volatility. These periods of high volatility are often associated with bearish (downward-trending) markets and can come with unpredictable price swings.

However, these periods of high volatility almost always present profit opportunities. By embracing volatility and understanding its role in the market, traders can outmanoeuvre inflation. The key is not to panic sell after an extensive market drop but instead to use these periods of high volatility as opportunities to buy high-quality stocks at a discount.

Leveraging High Volatility Index Readings for Strategic Advantage

Despite more than a dozen outbreaks since 1980, many with severe consequences, historical market data reveals a consistent pattern: after an initial knee-jerk reaction, the markets tend to trend higher. The Tactical Investor’s perspective resonates with this, emphasizing that “every disaster leads to a hidden opportunity.” Recognizing this, the key lies in avoiding succumbing to panic and viewing potential sell-offs, such as those prompted by the coronavirus, through a bullish lens.

Understanding the inherent tendency for mass panic, it’s crucial to step back and question actions that historically yielded negative outcomes. Maintaining a trading journal becomes pivotal during market downturns. Record the emotions, media headlines, and societal reactions, as this information becomes invaluable for future decision-making.

Presently, weekly charts indicate the markets are in extremely overbought territory, suggesting a potential need to release some pressure. However, monthly charts are exerting more upward pressure than usual. It’s worth noting that weekly charts move relatively slowly, providing a window for the markets to release steam. Staying vigilant and strategically utilizing high volatility readings can offer a valuable edge in navigating market dynamics.

The Role of Mass Psychology in Predicting Market Trends

Mass psychology, or crowd psychology, plays a significant role in predicting market trends. It studies how large groups of people can influence behaviour, including in the stock market. For instance, a prolonged rally in stocks or indices can result from such a mass force.

Professionals use two main methods of stock-picking: fundamental analysis and technical analysis. Fundamental analysis focuses on analyzing a company’s financials within the context of its industry, while technical analysis focuses on trends, patterns, and other indicators that drive stock prices. Market psychology is a crucial driver in technical analysis.

Market psychology describes the overall sentiment steering market trends and price action. Instead of being rational actors, human beings are greatly influenced by cognitive and emotional biases and are subject to the sway of herd instinct. This suggests markets are not the efficient engines of rationality assumed by mainstream economics.

The principles of market psychology underlie the motivations behind technical analysis, a trading strategy that identifies opportunities by analyzing historical price and volume trends. A good grasp of crowd behaviour is therefore crucial for revealing the workings of specific technical indicators.

Mass psychology is the study of group behaviour; the mass mindset draws comfort when it does not go against the views held by the majority. When people are overtaken by the power of greed or fear that becomes rampant in a market, overreactions can distort prices. On the side of greed, asset bubbles can inflate well beyond fundamentals. On the fear side, sell-offs can become protracted and depress prices well below where they should be.

In conclusion, mass psychology plays a crucial role in predicting market trends. Understanding the psychological state of the market can provide valuable insights into potential market movements and help investors make more informed decisions.

Moving forward, let’s delve into a historical perspective to illustrate how we proactively utilized readings from our tailored Volatility Index during the COVID crash. We intend to demonstrate that learning from history can be a powerful tool to avoid repeating past mistakes. By sharing this information in real time, we aim to showcase the actions we and our subscribers took during critical market events. This transparency underscores our commitment to discussing strategies and actively implementing them, aligning our actions with our words.

China Could be downplaying the situation.

In all likelihood, China is releasing particular pieces of data, but in general, the world is used to this. However, what could trigger a sharp market reaction if this data proves damaging? There have been previous scares; in each case, the markets sold off, but the sell-off proved to be a buying opportunity. The last sell-off was due to the Ebola virus scare in October 2018.

In the long run, this is not a negative development as the long-term trend is still bullish, so if it comes to pass, we will have an opportunity to get into stocks and ETFs at a discount. We have adjusted pending sell orders and stops and, in some cases, cancelled pending orders on the following ETFs. The bottom line is that while prudence is warranted, Panic is not; hence, focus on the trend and ignore the noise.

Volatility Trading Tip 2: Don’t follow the Herd

Hence, the statement below refers to several dangerous trends but not the ones that come straight to one’s mind:

This is a dangerous development as, over the past 12 months, we added a new psychological component to this indicator, and this new high corresponds to the Coronavirus outbreak. Interim Market Update Jan 31, 2020

We aim to provide further clarity regarding the term “dangerous” mentioned earlier to prevent any potential misinterpretation that may arise, leading to the assumption that we endorse unfounded conspiracy theories concerning this virus. Our analysis extensively examines the available data, particularly emphasising the psychological aspects.

We also looked at data evaluated by other level-headed experts; many thanks to our subscribers for providing links to some of these experts, which once again solidifies our claim that we are fortunate enough to have some of the best minds out there as part of our community. We have concluded that the Coronavirus issue is being blown out of proportion.

Weaponised news: A dangerous trend with no end in sight.

The first trend is that news will be weaponised to the extreme to support whatever narrative a group of individuals have decided to embrace or force on a subset of the crowd. Secondly, as V-readings have not surged to new highs, the market will experience more random bouts of extreme volatility, and this should be embraced when the trend is positive.

Thirdly, violence (as in wars, crime, etc.) and wild weather patterns will be more prevalent and extreme from now on, and we mean foolish behaviour will be embraced. Lastly, polarisation levels will rise so intense that we could reach a point where a simple disagreement sets off something akin to a mini-civil war.

Returning to the issue of the Coronavirus:

In the bustling markets of Asia, face masks are disappearing from shelves at an astonishing rate, indicating a significant surge in demand. Concurrently, we observe a notable uptick in the stock prices of companies engaged in vaccine development, highlighting substantial gains for these enterprises. It’s a scenario where companies seem to thrive while the general public navigates uncertainties.

The available data consistently reports a 3% mortality rate for this virus; no recent information has contradicted this figure. In this context, it’s intriguing to note that numerous financial experts lacking backgrounds in medicine or psychology are actively pronouncing that we stand on the brink of a pandemic. This raises questions about the motivations behind such assertions.

It’s worth noting that discussions around the “deep state” add another layer of complexity to the narrative. While some acknowledge the existence of an apparatus that could be termed the “deep state,” the depth of understanding among these experts appears limited at best.

Challenging Deep State Beliefs and Questioning Coronavirus Claims

These power brokers work on brainwashing people so the players are willing participants or blind participants (blind as in being mentally blind and not physically blind), which boil down to the same thing. These individuals are used as cannon fodder; the objective is achieved by pandering to their wild fantasies. This objective is achieved by allowing Gossip artists to masquerade as reporters. In the old days, they would be called fisherwomen.

We have found no objective data that backs the many claims non-experts are pushing regarding the Coronavirus; the only dangerous trends we see are the ones we have addressed above. Could the situation change? Yes, anything is possible, but history reveals that most naysayers are full of hot air, as the world was supposed to have officially ended a long time ago.

FAQ

Q: What is the significance of the surge in Volatility Index readings?
A: The surge in Volatility Index readings indicates that extreme behaviour can be expected both within and outside the markets. It serves as a warning sign of heightened volatility and unpredictability.

Q: How should investors approach the current market situation?
A: Prudence and caution are warranted in light of recent developments. While panic is unnecessary, it is essential to focus on the long-term trend and not be swayed by market noise. The current market volatility may allow investors to enter stocks and ETFs at discounted prices.

Q: How can high Volatility Index readings be advantageous?
A: Despite initial knee-jerk reactions, historical data reveals that market trends tend to recover and increase after outbreaks and disasters. This indicates hidden opportunities that can be spotted by maintaining a bullish perspective and not succumbing to panic. Panic-driven behaviour rarely leads to positive outcomes.

Q: How can investors overcome the instinct to panic?
A: Overcoming the instinct to panic involves observing the panic-driven behaviour of the masses impartially and questioning its effectiveness. Maintaining a trading journal, especially during market downturns, can provide valuable insights into emotions, media headlines, and reactions, enabling a more rational approach to investing.

Q: What are the current technical indicators suggesting for the markets?
A: The weekly charts indicate that the markets are trading in highly overbought ranges, suggesting a potential need for a correction. However, the monthly charts exert more upward pressure than usual, indicating that the markets can continue their upward trend before experiencing a corrective phase.