As I wrote last Friday, VIX traders were betting for high volatility by Wed (today) this week, as shown in the extremely high VIX call/put ratio. Well, they are right again and I'm happy to have this crystal ball that is more often than not correctly guiding me for the short term direction. Yesterday VIX jumped 15% at the intraday peak.
So far in the past year or so, the dip to the 50-day moving average (MA) line didn't always mark the absolute low of the move. But, in every case over the past year, buying at the 50-day MA proved profitable within a few weeks. But, there's something interesting happening now... pullbacks are being bought up much faster. It is very technical to explain this but in general, corrections in the stock market tend to unfold in three legs. There's the first move lower… Then there's the bounce... And then typically we get another decline to a lower low. If the lower low is associated with positive momentum, then the lower low provides the best buying opportunity. See the yellow highlighted arrows on the chart below show how that plays out.
But something changed starting in May. We got the dip, and we got the bounce. But the next decline formed a higher low. In other words, buyers were more eager than usual to step up. You can see the 3 blue arrows on the right side. Of course, nothing is wrong as long as traders can make money regardless of technicality and this trend may just continue for a while. But sooner or later, this Buy-The-First-Dip (BTFD) strategy will stop working as it is not a normal phenorman of trading. Instead, this is usually occurring near the end of a bullish trend. Here is the big warning, when the BTFD strategy stops working, it tends to lead to a more severe correction that will last for a while. I of course don't know when this will happen but I suspect this will be coming pretty soon, given various TA warning signs are flashing more and more lately.
Consider you are warned!!
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