Four things I need to see before buying a correction

There are four things I want to see before I'll put money to work into a correction. All four. Missing any one of them, I sit on my hands.

One. The trend.

It has to be a long-term uptrend that has corrected. A dip inside an uptrend is a different animal from a downtrend with a bounce in it. If the chart has been rolling over for a year, that's a different trade, and generally a worse one.

Two. Realised vol during the correction.

I want to see the stock falling on low realised vol. Orderly selling. Panic looks different, and the end of a panic is much harder to time than the end of an orderly pullback.

Three. And this is the one I have to remind myself to check.

What did implied vol do on the way down.

If implied vol was offered while the stock fell, nobody was scared enough to pay up for protection. That's a very different message from implied vol exploding on the same move. The first says nothing has broken. The second says something might have.

Four. Skew.

If skew is still pointing higher, the options market hasn't started pricing a serious left tail. That matters, because its suggests puts are getting monetised rather than added.

Put those together and you have a picture of a market that is getting exhausted to the downside and an uptrend ready to resume.

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