Keep Your Cool During Market Panic

Volatility usually spikes when momentum indicators turn bearish for stock indexes. This phenomenon occurred at the onset of the pandemic and over the past week as well. Note the jump in the volatility index, or VIX, at those times. Once a market begins to accelerate lower, my instincts tell me to calculate how far it will travel and how long it will take. During a decline, equity indexes tend to move two to three times their normal speed. For example, many recent day ranges for the S&P stretch the length of an average week, and the week range spans the length of a typical month.

I use average true ranges (ATR) by week and month to set price targets and gauge speed. Long-bodied red candlesticks and an increase in volume are common when negative momentum kicks in. When it does, measure a month range from the high and week range from first good bounce. The week ATR should be reached in 24 hours and the month ATR becomes the 3- to 4-day target. The chart below demonstrates how this works. The brackets show average day, week and month ranges.

Markets often pause or reverse when they become oversold or overbought. When a market moves the length of an average month in five days or less, it is thought to have reached overbought/oversold status, and thus will likely pause or reverse, as seen in the above graph. Another critical point is shown as “best bounce.” I make it a point to mark this now-critical resistance area. This area will likely provide resistance (attract sellers) when the market eventually rebounds.

Use these techniques to set strikes and pinpoint entry and exit levels. These practices help keep me focused and calm me when many market participants are in a panic.

John Seguin, Market Taker Mentoring

Trader Education