Jason Shapiro’s Reversal Formula for Crowded Markets

How Jason Shapiro Times Market Reversals

Jason Shapiro was featured in Jack Schwager’s newest book Unknown Market Wizards.
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Known as the contrarian trader, Shapiro looks for a mixture of technical and fundamental clues to time his trades
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Here’s how he does it…

PRICE RESPONSE

Shapiro’s general rule is to fade ‘crowded markets.’

However, we all know that markets can stay crowded for a long time before they eventually turn.

As they say, “The market can stay irrational longer than you can stay solvent.”

So, Shapiro combines a crowded market with a reversal trigger.

Here’s his thought process:

  1. Why are people buying or selling? (What’s the story or market engine?)
  2. Why are traders positioned the way they are?
  3. Wait for news to confirm the thesis. (For example, if the market is well-bid, the news needs to be bullish to confirm the reason for being long.)
  4. Look for the price to respond in the opposite direction. (If bullish news or data comes out, but the market moves lower.)
  5. Enter the trade.

Formula for a Reversal Opportunity:

A crowded market driven by a theme + More news to support that theme + Unexpected price response = Reversal opportunity

As Jason says: “Trade participation, not price” – something to ponder regardless of your timeframe.