Opportunity in Chaos

What a week.

Last week I laid out some of our knowns and unknowns heading into the storm.

The 4th known was… Capitulation rallies can be fast and brutal.

And guess what? This one was no different.

Wednesday brought one of the largest up days in market history.

These types of moves aren’t typically signs of a trend shift. They’re snapbacks.

Getting us back to levels that we lost when panic took over.

That’s what happens when the VIX spikes above 40, volatility begets chaos.

But that doesn’t mean we ignore the progress.

If anything, after weeks/months of preaching risk management, it’s exactly when fear is peaking and chaos enters that you have to start looking for opportunities.

Bottoms tend to occur in the midst of widespread panic.

For many, this pullback will eventually look like a gift.

You just won’t know it unless you were willing to buy when it felt the worst.

So this week, we want to focus on the good.

I’ve been highlighting a lot of the bad, just go back and read my post over the past month, the capitulation signs have been there but no signs of price follow through.

This week? We finally got a start. Just a start. But a start nonetheless.

And for the long-term investors, there are real technical developments taking shape.

This might be a true bottom or at the very least, a spot to hold your nose and add long-term exposure.

I usually write with an intermediate-term lens.

My holding periods are typically a few weeks to several months.

Winners can stretch into multi-year positions thanks to trailing stops, but that’s just a byproduct of staying in sync with price.

That’s my sweet spot.

It requires less day to day micromanagement. I love analysis but I don’t love being glued to the screen.

I’d rather slow down, flip through weekly charts over the weekend, and make clean gameplans when markets are closed and emotions are quiet.

Top-down technicals let me fish in the most stocked ponds, spot storms before they hit, and know when the water's dry.

But like everyone else, I also have a retirement account. And that’s managed on a much longer timeframe.

The beauty of technical analysis is that price charts are fractal.

The longer-term picture is just the short-term picture zoomed out. Same sequences, same behavior, just at different speeds.

On one timeframe, you might see opportunity.
On another, risk.
Both can be true.

Today, I want to zoom out and speak to the investor in all of us.

I’m 29. A large portion of my capital is earmarked for the long game.

That part of the portfolio couldn’t be more excited to add this week.

Meanwhile, my intermediate account?

Still mostly on the sidelines, waiting for the follow through we have talked about.

Let’s break it down.

Technical analysis is the study of markets and therefore, market participants.

How those participants behave can be quantified through price, sentiment, and positioning. Price itself is just the end product of human nature: fear, greed, panic, and all the biases we carry.

One key concept we use is polarity.

It’s simple a level that once acted as resistance (where sellers stepped in) turns into support (where buyers now show up).

These zones aren’t magic.

They show up because market participants anchor to them.

And more often than not, they show up at a confluence of signals: round numbers, moving averages, prior highs etc.

I don’t think that’s coincidence. I think it’s human nature.

Right now, many charts are sitting on these polarity zones with a confluence of support.

• Prior cycle highs.

• The 200-week moving average.

• Round numbers.

When you’ve got 2–3 pieces of supporting evidence pointing to the same level.

You pay attention.

It’s poker. You’re never playing with certainty. But you are playing with odds.

And when the setup improves and your risk is well-defined, that’s your edge.

Now with clear analysis we can come in with a clear head and….

Recognize. React. Execute.

For me, $480 on the $SPY ( ▲ 1.78% ) is the key level.

It’s has all the confluence of information we need.

• Prior cycle high.

• 200-week moving average sitting right below.

• VIX near 40, a panic trigger.

That’s a textbook spot for long-term capital to step in.

Let’s put that 200-week into perspective. It’s a 1,000-day moving average. A 40-month trendline.

That’s long-term money.

We don’t break that unless it’s a full-blown bear market and a real recession.

In most cases, it acts as a floor in the final stages of a drawdown.

And that’s where we are now.

I’m not calling bottoms. But when the long-term account gets a shot to deploy cash after:

• A ~20% drawdown.

• Holding the 200 week moving average AND prior cycle highs (polarity level).

• A rare oversold on the weekly RSI.

• VIX screaming panic near 40

You gotta swing the bat.

People love to say, “Buy when others are fearful.”

I’d add: Buy when others are fearful AND your risk is well defined.

That’s exactly what this was a clean, simple long-term add.

This is what 99% of market arguments boil down to: timeframe.

One trader’s sell is another investor’s buy not because one is wrong, but because their clocks are different.

While I typically focus on the intermediate, more tactical timeframe, this post was about stepping back.

Recognizing the encouraging signs within a drawdown and understanding how to act even if some of your accounts are stagnant or hurting.

It’s not about predicting the future.
It’s about using the past to guide decisions.
(Unless you’ve got data from the future. In which case…..let’s talk.)

This week gave me the green light to add to the long-term account, the one managed for 65-year-old Larry.

That $480 level gave us structure.
The panic gave us opportunity.
And the technicals gave us conviction.

If we’re getting close to The Bottom, the charts will start to show it.

Follow-through this week likely has me adding exposure back to my intermediate-term accounts.

I’ll be breaking that down with the charts, setups, and context in Thompson’s Two Cents, hitting inboxes Tuesday and Thursday.

Not getting it? Check your spam folder. Don’t miss the comeback.

Cheers!

Check out my weekly show with my friends at Stocktwits!

In the first 20 minutes, I break down market conditions and the Superpower I think many need to utilize in their short term accounts.

Put it on 1.5x speed and let it rip.

Cheers,

Larry Thompson, CMT CPA

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