The mean reversion strategy is a low risk – high reward short-term shorting strategy within the context of a bull market. The history shows that the market tends to create relentless bullish moves from the key pivots, which offer great short-term (from 2 to 5 sessions on average) shorting opportunities.
This post will be documenting all of the overextended rallies since the March 2020 bottom that led to the 5%-10% market corrections. I will be using the 5min SPX Renko charts.
When SPX goes into a relentless bullish momentum with a number of very short-lived dips, I measure the growth since the key pivot. When the growth is above 10%, I start to watch for potential reversal signs. When the growth is above 15%, the odds of a reversal increase with every tick higher. Sometimes the SPX reversal might happen immediately (e.g., September 2020) or SPX might build a small bull trap and then drop like a rock (e.g., May-June 2020).
May-June 2020
Rally – 456 points
Overextended – 16%
July – September 2020
Rally – 580 points
Overextended – 19%
September-October 2020
Rally – 332 points
Overextended – 10%
