Buy Low Sell High

This is the key to making money on Wall St., or on Main St., or on any street for that matter. It is, however, easier said than done and particularly on Wall St. There are two factors that are needed to make use of this key: liquidity and volatility. I made reference to these factors in my prior post on capitulation. Capitulation is determined by a spike up in volume (liquidity) and volatility. It can be reduced to a number and therefore determined. I will briefly give one method here.

In order to buy low you have to be a contrarian and have the discipline to buy when everyone else wants to sell. When there are massive sell offs in the market is exactly the time to buy. I am not referring to a particular company which may be going bankrupt but rather an index fund that represents the whole of the market. When the volatility is high it means that there is a panic. Panic is fear and fear will cause people to sell at exactly the wrong time. That is what happen today. When they sell the price is cheap and a good time to buy.

Market bottoms come when the volatility index is over 30 and the volume spikes high. One way to reduce this to a single number is to multiply the two numbers and keep track of the product of the two. On the day of capitulation the number will be the highest compared to the number on the days before and after. For example, one would multiply the $VIX index times the volume as follows: 33.10 x 10715096 = 354669677.6

I am including the same charts as I posted in the prior post to give a before and after view. I believe that today was capitulation. We will just have to wait and see.

NYSE TOTAL VOLUME


VOLATILITY INDEX


SPY daily chart

As can be seen from the charts above there is a correlation between the price of the SPY which I use here as a proxy for the market, Volume, and Volatility. While this pattern does not show up often, it does mark bottoms in the market. The market does however have many bottoms and will no doubt have many more.