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Tackle Today: Fading Extremes

February 4, 2022

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Tackle Today: Fading Extremes

≈ A Choppy Market Tactic. ≈


The market bounce was glorious, no doubt. The S&P 500 staged a rousing 7% leap over four trading sessions (Jan 28 – Feb 2). But unfortunately, price proved unable to climb back above major resistance zones. With Thursday’s -2% drubbing, we have another lower pivot high to contend with.

If you got sucked into chasing bulls late in the rally, I suggest adopting a new technique during times like this. I call it “Fading Extremes.”

When volatility rears its head; when the SPY daily trend turns from up to down; when overnight gaps multiply, and follow-through is somewhat lacking – fade the extremes by selling strength and buying weakness.

It’s a play on mean reversion, a bet that oversold markets will get bought while overbought markets get sold. While it’s impossible to nail the top and bottom of every swing, it is possible to identify when prices may have swung too far in one direction or the other.

And if you use high probability strategies like credit spreads or naked puts and scale-in, then getting close to the turning point is good enough.

For example, my Team Phoenix lab entered bear call spreads on Wednesday to fade the strength. If the markets cooperate and we see multiple down days to push prices into oversold territory, we will look to “fade the weakness” by deploying bullish plays like bull puts.

And if prices simply fiddle in the middle of the recent range, we’ll sit tight and wait for the market to come to us. Patience is a virtue worth its weight in gold when the market’s a mess.

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