Market Sentiment and Volume Reach Extreme Panic Levels

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 |  Includes: GLD, SLV, SPY
by: Chris Vermeulen

It was a crazy session as the stock market slid over 2% on heavy volume. This type of price action means fear has taken control of the masses, who are unloading their stocks in anticipation of much lower prices.

Trading off extreme levels of fear can be very rewarding if done right. That’s because fear is the most powerful reaction we as humans have and it’s somewhat predictable. Fear can make people do crazy and/or stupid things and it’s these extreme reactions that investors evince in the market that lead to great trading opportunities. Buying into fear and selling into greed is what I focus on.

Gold and Silver Showing Greed and Fear
For example, if we take a look at the four-hour chart of gold and silver, you will see how investments with a large amount of speculation like silver move the opposite to what other related investments like gold are doing.

The first chart shows how yesterday’s fear had investors moving into the gold 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 when prices start to slide in the stock market, these speculative holders of silver get scared and sell their positions 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 telling me that traders are getting scared of a market selloff.

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More Evidence Showing Signs Of Fear
The data points below clearly show sellers were in control. I like to look at the NYSE because it holds all the big brand name stocks which the masses like to buy when they feel lucky. So when I see this many traders selling and so few buying, I know the masses are dumping shares and going to cash.

The Nasdaq 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 on that exchange. So brand name stocks getting dumped all at once is another sign of extreme fear hitting the market.

Still More Evidence Showing Signs Of Fear
The 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 where 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 soon.

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Evidence Showing Signs of Fear and an Oversold Market Condition
Take a look at the 10-minute SPY (S&P 500) chart below. Simple visual analysis shows that yesterday’s strong selling, which 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 all the evidence, we 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.

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Mid-Week Trading Conclusion:
In short, yesterday’s sharp move lower has put the market in a short term oversold condition -- meaning a bounce is very likely to take place within the next three sessions. With the masses selling their positions in stocks and commodities, it generally takes one to three days after a day like this 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 at a sharp discount, I feel we have a rough road ahead.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SPY over the next 72 hours.