Main Points
What is a V-Shaped Recovery?
Risks To Both Sides of the 'V'
Sharp Drops Can Lead To Buying Opportunities
Exact Bottom Unknown, But The Reward-To-Risk Is Appealing
What if I Missed The Bottom?
Stronger 'Readings' Into The Bottom vs The Subsequent Recovery
The Data Helps Traders Prepare For Opportunity (Sibanye Stillwater as an example).
Being Approximately Right.
What is a V-Shaped Recovery? In stock market terms, this translates to a steep drop in stock prices, quickly followed by a significant surge back to previous levels, or even higher.
What are we trying to achieve? Buying into a declining share may reflect the traders anticipation of a near-term recovery. Buying at a certain level does not mean that the trader is call that particular point as the exact bottom.
What Are The Risks To Buying Early? i.e. Buying As The Price Is Declining
- A further decline beyond a trader's pre-determined risk limits
- Negative news flows (from the company or within the macro environment)
What Are The Risks To Buying After The Bullish Reversal? i.e. Buying As The Price Is Recovering
- A pullback/continuation selling pressure.
Below, a share chart shows the price having sharply declined, followed by a bullish reversal.
This, is a great example of two V-shaped recoveries on one share (Sibanye Stillwater).
Does the data we look at support the case for buying into these declines?
In most cases, yes.
As noted above, Sibanye Stillwater is a great example of this. Let's looks at the first 'V' back in September 2024. The low exact was on 11 September. On this basis, we look at the two days leading into that, in order to determine whether the readings timeously prepared traders for a buying opportunity. Below the time stamped readings for 09 and 10 September are shown (both short and medium term). The dates, times and readings are marked in red.
Now, let's looks at the second 'V' which started back in late February 2025. The low exact was on 28 February. On this basis, we look at the two days leading into that, in order to determine whether the readings timeously prepared traders for a buying opportunity. Below the time stamped readings for 26 and 27 March are shown (both short and medium term)
What if I Missed The Bottom? The price action model readings on the 'rising' side of the 'V' often alert traders to a price that is finding buyers or strengthening. In some cases, they are somewhat cautious and tend to wait for further strength to alert to traders to getting involved. For example, on 12 September, SSW rallied by 9% on the day. This is what the price action model reading had to say: "The share is rangebound in a weak regime . A recovery buy/long is triggered on strong bids and a break of the current range high"
On 05 March, SSW rallied by 4% on the day. This is what the price action model reading had to say: "Attempting a bullish reversal following a steady downward trend". The share then went on to rally from around R15 to the recent high of above R20.
Conclusion: Timing is very hard, however, it is possible to be approximately right, with minimal downside. The above example highlights how the awareness of a technical position combined with multiple time frame probabilities can lead to profitable outcomes.
Trade JSE Shares with Unum Capital.
To get started, email tradingdesk@unum.co.za or lester@unum.co.za
Lester Davids
Analyst: Unum Capital
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