January 24, 2022


Technical Analysis of Financial Markets

What’s The Most You’ve Ever Lost On A Coin Toss?

What's The Most You've Ever Lost On A Coin Toss?

With markets as volatile as they have become this week, picking individual stocks can seem like a coin toss. But no matter the environment, we have to remind ourselves that prices have memory, and the same sets of techniques and patterns we have used all along can still prove effective.

In markets with more speed and volatility, I find myself relying a bit more on quantitative confirmations, reducing position sizing, and tightening up my risk management rules. This serves to reduce emotion which is of the utmost importance in trading volatile markets.

Those of you familiar with volume profile charts understand how they relate to the standard normal distribution. While I won’t go into a full discussion of that here, I can provide example after example of how risk assets respect not only the high volume and low volume nodes, but also the upper and lower bands of the value areas. In very plain language, stocks, futures, etc. don’t like to get too far away from home. Some refer to this as reversion to the mean.

In going through hundreds of charts this week, I have noticed time and time again on the daily level, taking into account one year of history, we are seeing moves like this:

The yellow lines you see on the right side of the chart are the upper and lower bands of the value area contained between them. When price trades down to this lower band, we often see a bounce back towards the Point of Control, (red line) or where the most traded volume has occurred for the timeframe in question.

You can see in $CHKP price has fallen this week down and through the lower band of the value area. It is getting further away from where it is comfortable (its point of control) and I expect a bounce higher back to where it feels more cozy. You can also see that price has traded below $98 which were the lows about a year ago, likely running stops for the folks who got long there. Unfortunately, the market knows stress points and does whatever it can to hurt people. Now that those guys are knocked out, I am here to pick up the pieces, like a good friend.

You need to call it, I can’t make the call for you, it wouldn’t be fair. You stand to win everything. Call it.

Long March $100 calls in $CHKP here.