Support Will Follow Panic Sell Off

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The market yesterday looked like fear had taken control of investors as it slid more than 2% on heavy volume.

Trading off extreme levels of fear can be very rewarding if done right. Fear can make people do crazy and or stupid things and it’s this extreme reaction which investors do in the market that lead to great trading opportunities.

Gold and Silver Showing Greed and Fear

Take a look at the four-hour chart of gold and silver and you will see how investments which have a large amount of speculation like silver move in the opposite direction to  what other related investments like gold are doing.

The first chart which is gold, shows how today’s fear had investors moving into this shiny safe haven. Silver on the other hand has been the investment of choice for every Tom, Dick and Harry trying to play the popular headline investment. So on a day like yesterday these speculative holders of silver get scared and sell their position in stocks and silver. The problem with silver is that the market is still small and its does not take many people hitting the sell button to send it 5% lower. This is one sign which is telling me traders are getting scared of a market sell off.

Evidence #2 Showing Signs of Fear
I like to look at the NYSE Euronext (NYSE: NYX) because it holds all the big brand name stocks which the masses like to buy when they feel lucky. When I see this many traders selling and so few buying I know the masses are dumping shares and going to cash.

The NASDAQ OMX (NASDAQ: NDAQ) had 10 shares being sold to every one share being bought, which is half the fear level of the NYSE and that makes good sense. The NASDAQ has many smaller companies which the masses just don’t know about or own so there was not as much selling taking place. Brand name stocks getting dumped all at once is another sign of extreme fear hitting the market.

Evidence #3 Showing Signs of Fear
This chart below provides the momentum of the market. I think of it as the rubber band effect. If the market selling momentum is strong enough then it pulls this indicator down to a level which it cannot go much further before it gives way and moves back a neutral or positive extreme level. This little hidden gem of an indicator can help time entry and exit points with ease once you understand it. Currently it’s telling us that a pause or bounce is likely to happen today.

Evidence #4 Showing Signs of Fear and an Oversold Market Condition
Take a look at the 10 minute SPDR S&P 500 (NYSE: SPY) chart below. Simple visual analysis shows that today’s strong selling has brought the market down into a support zone should provide a pause or a bounce very soon. The question is how big will the bounce or rally be?

Given that many are looking ready for a bounce I feel we could be nearing not a bounce but an intermediate bottom and higher prices going forward. But if we break strongly below this support level then all bets are off and much lower prices should occur.

 

Mid-Week Trading Conclusion:

In short, yesterday’s sharp move lower has put the market in a short-term oversold condition. That means a bounce is very likely to take place within the next one-to-three sessions. With the masses selling all their positions in stocks and commodities it generally takes one-to-three days after a huge sell off day for the selling pressure to dissipate and for value buyers to step back into the market providing support.

I think both stocks and commodities will strengthen in the next few days and we will see if the market can get some traction and start a new rally. But until everyone has sold out of the market giving their shares to the big money (smart money) at a sharp discount I feel we have a rough road ahead.

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Article printed from InvestorPlace Media, https://investorplace.com/2011/06/support-will-follow-panic-sell-off-spy-nyx-ndaq/.

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