How often does the market reverse?
Are indices more likely to reverse when implied volatility is high, or low?
Trade reversals are defined as open higher reversals, in which the market opens above and then closes below the previous day’s close, or open lower reversal, in which the market opens below and then closes above the previous day’s close.
The percentage of intraday reversal occurences have decreased since the last financial crisis.
This is due less volatility, which leads to fewer intraday reversals. We’ve gone into a period where markets are pretty complacent- there aren’t nearly as many reversals now as there were in the early 2000s.
One can postulate that intraday reversals and high volatility are positively correlated, based on the above information. But overall, the market just seems to reverse about 1/3 of the time, pretty much independent of the VIX level. There is a higher number of reversal occurrences when the VIX is above 15, but it isn’t significant (it happens 33% of the time, compared to 30% of the time when the VIX is less than 15).On average, the VIX market reverses about 80 times per year, happening about 32% of the time.
Since 2008, we’ve experienced a smaller number of intraday reversals due to the slow upward grind of the market. Due to this, we are entering a time where volatility and reversals are going to normalize- it is simply a question of when.
Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can balance your risk/reward, and trade small, and trade often.