Bull Volatile Market Regime: This Is Where Things Get Interesting

Aug 26, 2020

Earlier this week I mentioned that I expected to see the $NQ close the month flat around the 11,600 to 11,700 level. That still is a possibility, but today we find ourselves on the doorstep of 12,000.

Why is this level so significant? 

  1. It is rare that we find ourselves so many stand deviations above the mean.
  2. Not rare, is that we have completed a measured move higher from the February highs to the March lows
  3. Historically closing the month >3 standard deviations higher from the open of the month indicates a larger down move the following month. 

The 3 std deviations works both on long and short side, It doesn't always preface a major reversal. For example it worked 2 times (so far) in 2020, 4 times in 2019. It also preceded the January 2018 Volpocalypse selloff, however it didn't precede the September 2018 selloff. 

And yes, this sounds oddly familiar to what every perma-bear fear mongerer on Twitter has been writing about since the March bottom (of 2009), day after day, week after week. I get it.

But Chris, you are the perma-bull who bought dip after dip, throwing caution to the wind and making fun of perma-bears,  why are you suddenly jumping on the fear mongering bear bandwagon? 

I'm also the market regime guy. I leave the fear mongering for others, this is simply a quantitative price extension that tends to find weakness and market extremes.

And we currently find ourselves in the Bull Volatile market regime via the SQN, which is how we track price volatility, categorize market regimes and identify exploitable characteristics in markets. 

What we know about the Bull Volatile market regime is that it doesn't actually indicate a market top, but it IS a prerequisite to a major market top. We tend to lighten our exposure here or look to hedge.

In the past twenty years, when the $NQ was in a Bull Volatile Regime and closed the month >3 Standard Deviation it has led to declines 8/10 times, four of which were -10% or worse. 

  • 7/2007 -10%
  • 9/2009 -5%
  • 4/2012 -12%
  • 12/2013 -1%
  • 8/2014 -10%
  • 4/2017 +1%
  • 5/2017 -7%
  • 1/2018 -13%
  • 12/2019 +5%
  • 2/2020 -30%

In the trading lab we are keeping a close eye on how $NQ closes the month and we are looking to hedge our long positions or lighten exposure, as per the market regime. 

This is where things get interesting. 

Trading is isolating, it's hard to find a good group of like minded traders who are actually trading the markets successfully and not gambling on headlines or fear, that is what we have in the Trading Lab.  Join us where we do the detailed in depth quantitative price based systematic trading. 

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