Fractal Perspective: Short-Covering is a trait of a Volatility Compression

Last week make me remember what I read from Benoit Mandelbrot that "time runs faster in Volatility compressions". I re-did one of my earlier analysis from 2008 when I used his concept to show that something had changed in the structure of the market.

Seeing last week was a prime example of this where we had wide range days back to back, with gut wrenching moves that lacked liquidity and screamed panic.

Above you see True daily ranges of the DOW in % showing a positive reading when the market closed up and vice versa. We define a short squeeze when the market goes through a range of 6% from bottom to the top in a single day.

We observe that when the ranges stay within a +/-4% Range the market is in healthy state of mind. Only when the ranges move into the 6% area like after a panic sell down we know it is a squeeze.

We picked some relevant periods in history to convey our point as you see above.

KEY MESSAGE:

• 6% Range Short-Coverings usually point to a lower low later in the future. Meaning once the bounces are done the 6% range moves demand re-tests of the low and tend to go lower.......
• -6% Range down days tend to kick off bear raids
• WE HAD BOTH !!