Finding the Top 20 V-Shaped Reversals

Let's examine this logic of the setup in more depth and figure out what we're seeing in the first place.

Starting off with a typical day...

Here's a look at our Live Scanner from November 18th (the date isn't important - the flow is).

 

Today, there were 234 trades that closed on our scanner.

Let's say that you are only interested in buying stocks, not selling them.

With that filter, you had "only" 173 trade opportunities today.

Let's continue running with that.

That means you had 173 different "places" where you had an edge, with regards to volatility.

With this setup, our goal is to filter down to the "Top 20" trades from that list of 173.

These are the 20 best trading opportunities because we have a high(er) probability of a V-Shaped Reversal (which means low risk-high reward).

And, we need to be able to find the "Top 20" trades, every single day, using the same (repeatable) process.

Our goal is to eliminate any discretion in the trade setup, and keep it as "programmatic" as possible. In future videos, I can also share some examples of using semi-automated trading scripts, to enter trades that meet our setup rules for you.

 

Setup Logic

Let's look at a real-world example to "open the hood" and see how this setup fundamentally works.

Since this setup is a fade setup, we are looking to either "Buy the Dip" (V-Shaped Bottom) or "Sell the Rip" (V-Shaped Top).

Let's continue using the assumption that you're a long-only trader, which means you are looking for a v-shaped bottom pattern only.

Ask yourself the following questions:

1. Would you rather be a buyer of the dip in stocks/ETFs that have an overall bullish trend on larger time frames, or a bearish one? Answer: The bullish one, of course.
2. Would you rather be a buyer of the dip in stocks and ETFs that are selling off into key volatility zones (where they tend to reverse from anyways, even without longer-term trend context), or would you rather guess where you think the selling will stop? Answer: Key volatility zones over "guessing" any day.
3. What if these volatility zones overlap with "important" levels on a daily chart? Say a 50-SMA, or even the Market Pulse line? Answer: Heck yes, sign me up!

To summarize, we are looking for stocks that are currently "selling-off" intraday, but have a bullish trend on larger time frames (including the daily time frame).

Here's an example of such an overlap, in AMD...

Our daily trend was very much bullish (though, you could make the argument we were "over-extended")

Our 30 minute trend was also, very much bullish, and the Market Pulse line overlapped nicely inside of the Volatility Box zone. Now, this becomes your classic "buy the pullback in a trend" setup.

And even on the 15-minute chart, the trend is bullish, and this is yet another opportunity to buy a pullback.

We have bullish bias on the 15-minute, 30-minute, and Daily timeframe charts.

Now, drilling down to a 1-minute time frame chart, let's take a look at what happens when price hits our Volatility Box reversal zones.

A near-perfect reversal, with little to no heat on the trade.

For me, the context is critical, and knowing that price has hit either the Aggressive or Conservative Volatility Box helps to know that I am not "overpaying" given that these are usually some of the lower prices for the day.

 

The "Cup" Pattern

Once price action breaches our Volatility Box zone, we need a sign to actually get into a trade. A trigger signal.

For this setup, that trigger signal is a very specific cup pattern, which is our cue to enter a trade.

Let's zoom into that same 1-minute timeframe chart of AMD, so you can see this pattern in a bit more detail.

Price action breaches our Volatility Box, and the wedges form a cup-like pattern, that is confirmed by the Edge Signal indicator (green arrows on our charts).

All of these indicators are available in the downloads folder on the Insights page inside of the platform (and free for all Stock Volatility Box members).

You'll see many more examples of this pattern as we go through the next few videos, which should help with training your eyes to recognize the pattern whenever it forms.

 

Summary

The goal of this setup is to find "Buy the Dip" in stocks/ETFs that:

1. Have a longer-term bullish trend, that has been ongoing
2. Breach our key volatility reversal zones
3. Show the "cup" pattern on a 1-minute chart

For "Sell the Rip" setups, we are looking for the opposite:

1. Have a longer-term bearish trend, that has been ongoing
2. Breach our key volatility reversal zones
3. Show the "upside-down cup" pattern on a 1-minute chart

In the next section, we will get into the specifics of how to set up your trade.

This will include the exact entry criteria that must be met, for us to enter a trade.