Skew, a term used in technical analysis, refers to the tendency for prices to deviate from their expected path. When skew is at current levels, it can signal serious fear among market participants regarding a potential downside move. In this blog post, we will delve into the concept of skew and its implications on the market.

Firstly, let’s understand what skew is. Skew is a measure of the asymmetry of distribution in prices. It indicates the degree to which price movements deviate from their expected path. When skew is high, it means that prices are more likely to move beyond their historical range than to return to it. This can be seen as a sign of fear among market participants, as they anticipate a potential downside move.

The current levels of skew are significant because they indicate a heightened level of fear among investors. The recent market volatility has led to increased anxiety among traders, causing them to become more risk-averse and conservative in their investment strategies. This can be observed in the high levels of option implied volatility, which is a proxy for skew.

Moreover, skew can also be used as a tool for identifying potential trading opportunities. When skew is high, it can indicate that prices are more likely to move beyond their historical range. This means that traders can consider taking positions that benefit from a potential downside move, such as buying put options or short selling.

However, it’s important to note that skew is not a foolproof indicator and should be used in conjunction with other technical and fundamental analysis tools. It’s also crucial to keep in mind that skew can be influenced by various factors, including macroeconomic conditions, political events, and investor sentiment.

Skew at current levels is a signal of serious fear among market participants regarding a potential downside move. While it can be used as a tool for identifying trading opportunities, it’s important to approach it with caution and to combine it with other analysis tools for more accurate market insights.