Identifying Market Reversals: Strategies for Traders by Shubham Agarwal

Market reversals provide some of the most profitable trading opportunities, but they require careful analysis to differentiate between a genuine trend reversal and a temporary pullback. According to Shubham Agarwal, an expert in technical and derivative analysis, traders can use a structured approach to identify potential reversals by focusing on three crucial indicators: Price Strength, Open Interest (OI), and Implied Volatility (IV).

By leveraging these market signals, traders can improve their decision-making process, avoid false breakouts, and maximize gains in volatile conditions. These scanners help assess whether a stock is showing early signs of recovery before the broader market follows suit.

The Challenge of Spotting Market Reversals in a Consolidating Market

In a bearish or volatile market, traders often find it easier to make quick entry and exit decisions due to heightened price swings. However, when indices consolidate at lower levels after a significant decline, it becomes challenging to determine whether the market is preparing for a deeper fall or a potential reversal.

Agarwal highlights that consolidations occur not because the entire market stops moving, but because some stocks continue falling while others start recovering. This divergence creates opportunities for traders to identify outperforming stocks that might lead a reversal.

To solve this dilemma, he suggests a systematic approach using three scanners that focus on price movement, institutional positioning, and trader sentiment.

Scanner #1: Price Strength – Identifying Stocks That Show Resilience

Why is Price Strength Crucial?

One of the first signs of a potential reversal is a stock’s price resilience compared to the broader market. If a stock is showing relative strength while the market is weak, it could indicate accumulation by institutional investors.

How to Identify Price Strength?

1. Look for stocks that are positive for the day, even when the broader market is down.
2. Analyze price action over the last 10-15 days to see if the stock has fallen less than the benchmark index (e.g., Nifty or Sensex).
3. Compare price performance relative to the market: If the Nifty has dropped 5% in 10 days but the stock has only fallen 2%, it signals relative outperformance.

Why This Matters?

Stocks that resist sharp declines tend to be the first to recover when market sentiment improves. By focusing on these stocks, traders can position themselves ahead of a potential market reversal.

Scanner #2: Open Interest (OI) – Tracking Institutional Activity

Understanding Open Interest and Its Importance

Open Interest (OI) represents the total number of outstanding futures and options contracts. Tracking OI helps traders gauge institutional participation in a particular stock or index.

How to Use Open Interest as a Reversal Indicator?

1. Increasing OI with rising prices → Indicates fresh long positions, which is a bullish sign.
2. Increasing OI with falling prices → Suggests aggressive short selling, a bearish signal.
3. Declining OI with rising prices → Implies short-covering rather than genuine buying interest.

Scanner Criteria for Reversals:

• A stock must show price strength (Scanner #1) before analyzing OI trends.
• Open Interest should exhibit a rising trend in recent days, indicating institutional buying.
• If OI increases along with price movement, it confirms strong market participation, reducing the risk of a false reversal.

Why This Matters?

Institutional investors tend to lead market trends, and tracking OI allows traders to align their positions with big money movements.

Scanner #3: Implied Volatility (IV) – Gauging Market Expectations

What is Implied Volatility?

Implied Volatility (IV) measures the market’s expectation of future price fluctuations, derived from option pricing. It helps traders assess whether market participants anticipate high volatility (uncertainty) or stability (potential reversal).

How to Use IV for Identifying Reversals?

1. Falling IV → Signals reduced fear and potential market stabilization, often preceding a price rise.
2. Rising IV → Indicates increased uncertainty, which can lead to further price declines.
3. Compare IV to previous weeks’ data: If IV is lower than last week, it suggests reduced downside risk and a possible reversal.

Final Confirmation Step:

• If both Price Strength and Open Interest confirm a potential uptrend, Implied Volatility should be declining to validate market sentiment.
• This ensures that the reversal is supported by both technical indicators and trader psychology.

How to Implement This Three-Step Strategy?

Step-by-Step Trading Approach:

1. Use the Price Strength Scanner to shortlist stocks that are holding up well during market weakness.
2. Confirm Open Interest Trends to ensure institutional investors are participating in the move.
3. Analyze Implied Volatility to gauge market sentiment and forward-looking expectations.
4. Enter a trade only when all three scanners confirm a reversal signal, increasing the probability of success.

Where to Find These Data Points?

• Stock exchange websites (NSE, BSE, NYSE, Nasdaq, etc.) provide Open Interest and IV data.
• Trading platforms like Zerodha, Angel One, Upstox, Bloomberg, and Reuters offer real-time market screening.
• Third-party financial analytics tools allow traders to monitor institutional positioning and sentiment indicators.

Why This Strategy Works in Complex Market Conditions

Agarwal’s three-scanner approach is particularly effective in uncertain markets because it combines price action, institutional activity, and sentiment analysis to filter out noise.

Benefits of Using This Approach:

• Reduces false breakouts by requiring confirmation across multiple indicators.
• Increases trading accuracy by aligning positions with institutional money.
• Provides a data-driven framework, minimizing emotional decision-making in volatile conditions.

A Systematic Approach to Identifying Market Reversals

By integrating Price Strength, Open Interest, and Implied Volatility, traders can enhance their ability to identify early reversal signals with higher accuracy.

This structured method helps traders filter out short-lived recoveries and focus on high-probability setups that can generate consistent profits. In today’s volatile markets, where trends change rapidly, using a data-driven approach like this is essential for maximizing trading success.

As more traders recognize the power of multi-indicator confirmation, this methodology is becoming a go-to strategy for professional and retail investors alike.