Panic Signs at Market Bottoms

From time to time we see dramatic price drops, the recent market drop in 2022 comes to mind. Every trader wants to time the bottom of the market and live the dream of buying low and selling high. But the reality is that it is very difficult to time the bottom of a bear market. The following 5 clear signs will help you achieve better trading results.

If we are patient and pay attention to the signs, we can profit. The tricky part is recognizing a bottom without confusing it with a temporary bear market bounce. It is a matter of not getting caught going long too soon.

There is a very fine line between making a safe, very profitable trade and catching a falling knife. That is why I want to share with you the signs that indicate panic selling and therefore a good buying opportunity. In this article, I will give you a brief overview of these panic signs, while in the following articles I will explain them in more detail with examples and give you the best strategies to make the most of these rare opportunities.

How to time the market bottom?

Investing and trading is all about buying things well. It is about buying ETFs, stocks or options at a discount. But in order for us to buy things for less than they are worth, someone else has to sell them for less than they are worth. One thing, and in my opinion the most important thing, that drives someone to sell stocks at a discount is panic.

Panic is an emotion that drives people and drives the stock market. People buy in panic for fear of missing out, or investors sell in panic for fear of further declines. Our goal should be to detect the maximum amount of panic in others so that we can be sure that we are buying things for less than they are worth.

To do this, we must first avoid panicking ourselves, and second, recognize the maximum negativity of others (panic). We need clear and objective signs to guide us in times of bad economic news, rapidly falling prices, and news anchors outdoing each other with dire predictions, like road signs that tell us when the market bottom is near.

So the natural question to ask is: How do you spot panic in the stock market?

5 Panic Signs for time the market

The 5 Panic Signs are a reliable indicators for spotting panic and potential market bottoms. They will not all occur at the same time, sometimes one is missing, but at market lows they tend to cluster.

90% Down Days

Known as the “90 Down Days,” this phenomenon highlights instances where an extraordinary 90% of trading volume coincides with downward price movements, providing a distinctive lens through which market behavior can be elucidated.

For participants deeply rooted in the financial markets, the nuanced interplay of supply and demand remains a constant exploration. Central to this exploration is the careful tracking of trading volumes-a critical metric for assessing market activity and discerning prevailing investor sentiment. The crux of the matter materializes on days when a significant portion of trading volume mirrors the trajectory of declining prices, culminating when 90% of trading activity is associated with downward trends.

These events, characterized by their rarity and consequential impact, are interpreted as signals of market panic, suggesting potential shifts in market sentiment and trader behavior. An examination of this phenomenon reveals two possible scenarios. In a bullish market, a precipitous decline may indicate that institutional investors are strategically dumping assets at their peak, signaling an impending market turning point. Conversely, in a bearish market, a day of pronounced downward pressure could indicate the potential establishment of a market bottom, providing strategic opportunities for contrarian positions.

Here you can find the Panic Sign “90% Down Days”.

Here you can find the in-depth guide to 90% Down Days.

VVIX above 140

Developed and calculated by the Chicago Board Options Exchange (CBOE), the VVIX, or Volatility of Volatility Index, provides unique insight into market sentiment, particularly as it relates to fear and uncertainty.

At its core, the VVIX measures the volatility of implied volatility in the options market. Simply put, it measures how much fear or anxiety there is about potential future market movements. This makes it an important tool for investors looking to anticipate and navigate turbulent market conditions.

One of the outstanding features of the VVIX is its ability to serve as a leading indicator of market panic. When the index crosses the 140 threshold, it often signals a heightened level of investor concern. A case in point is the memorable event of March 18, 2020, when the VVIX spiked above 200. This spike was a clear sign of panic in the market, causing investors to reassess their positions and strategies.

Here you can find the Panic Sign “VVIX above 140”.

3 Point VIX Reversal

The VIX, or Volatility Index, is an important measure of market sentiment, often referred to as the “fear gauge. One important aspect is the establishment of a panic threshold, typically set at the 20 level on the VIX. When the VIX exceeds 20, it serves as a red flag to traders, signaling increased market anxiety and the potential for heightened volatility. Historically, sustained readings above 20 have correlated with turbulent market conditions, prompting traders to exercise caution and reassess their positions.

Analyzing the long-term trends of the VIX reveals its role as a leading indicator during significant market events. The VIX tends to exhibit cyclical patterns, rising during periods of financial stress and falling during periods of market stability. For example, during the 2020 crash, the VIX spiked dramatically, reflecting the heightened uncertainty in the market. Understanding these long-term trends allows traders to contextualize current market conditions and make informed decisions based on historical behavior.

The Green Signal trading strategy introduces a proactive approach to identifying potential market bottoms using the VIX. Unlike the cautionary red signal (VIX above 20), the green signal represents an opportunity for traders. To trigger the green signal, the VIX must not only drop below 20, but also exhibit certain intraday characteristics. It should make a new high that exceeds previous levels and then retreat from that high by at least three points by the end of the trading day. This nuanced strategy helps traders distinguish between temporary market fluctuations and true reversals.

For day traders, using intraday signals from the VIX becomes a powerful tool for navigating short-term market movements. The VIX’s ability to reflect changes in implied volatility throughout the trading day allows day traders to identify key moments when institutional participants adjust their risk exposure. An intraday spike of three points or more in the VIX indicates a potential shift in the strategies of large institutional traders. This information is invaluable to day traders looking to capitalize on short-term market fluctuations through futures trading or other intraday strategies.

Here you can find the Panic Sign “3 Point VIX Reversal”.

Put/Call Ratio

The Put/Call Ratio is an important measure of market sentiment. A ratio above 1 indicates bearish sentiment, while a ratio below 1 signals bullish sentiment. The CBOE is an important platform for obtaining these crucial measurements. Traders use a threshold, often 1.40, to identify extremes. For example, a ratio of 1.40 indicates an overhang of 40 puts for every 100 calls, indicating heightened market fear.

A put/call ratio of 1.40 or higher serves as a strong indicator of panic, often coinciding with market bottoms. Visual representations through charts highlight this correlation. End-of-day measurements have limitations as they may miss intraday extremes due to market fluctuations. Traders turn to intraday data, particularly from the CBOI, for a more nuanced view. Early trading hours often contain heightened panic signals, providing a valuable timeframe for assessing market sentiment.

Here you can find the Panic Sign “Put/Call Ratio”.

New Highs/New Lows

The simple concept of new 52-week highs and lows provides a valuable snapshot of a stock’s performance over a one-year period. This metric not only provides insight into a stock’s resilience and trajectory, but also serves as a key indicator of market dynamics.

In bullish markets, the ratio of new highs to new lows should clearly favor the former, indicating bullish market sentiment. Conversely, in bearish markets, the pendulum swings toward an abundance of new lows, signaling a potential downturn and warning investors to be cautious.

Now, to get to the heart of our discussion, we will examine panic signals, with a particular focus on the ratio of new highs to new lows. During times of market distress, a unique panic signal takes center stage – a ratio of 1 to 100. This striking imbalance implies a hundredfold increase in new lows compared to new highs, and stands out as a robust indicator of market panic.

Here you can find the Panic Signal “New Highs/New Lows”.

How to use Signals of Panic in practice?

It’s important to consider these panic signals in combination, not in isolation. Rarely does one signal provide a complete picture. Combining several indicators, such as 90% Down Days, VVIX above 140, 3 Point VIX Reversal, Put/Call Ratio, and New Highs/New Lows, increases the accuracy of your analysis.

Market dynamics are constantly changing and panic signals can arise and dissipate quickly. Regular monitoring, preferably on a daily and weekly basis, is essential. Establish a routine for assessing the status of these signals to ensure that you stay ahead of market changes and make timely, informed decisions.

Recognize the broader context of these panic signals. While they can be powerful indicators of potential market bottoms, it’s important to understand that markets are dynamic and conditions can vary. As seen in the 2022 market decline, dramatic price movements can occur unexpectedly. Use these signals as part of a comprehensive strategy, combining them with technical and fundamental analysis for a well-rounded approach.