The past few weeks traders and investors have been completely spooked from the surge of negative news and collapsing stock prices. This fear can be seen by looking at the volume on the gold ETF (GLD) fund. With gold being in the spotlight for several years now and the fact that anyone can own gold simply by buying some GLD shares, it only makes sense that reading the volume on this chart gives us a good sense of what the masses are feeling emotionally.
If we step back to trading basics we know that fear is the strongest force in the financial market for moving prices. And that there are a few ways to read fear in the market and the more that line up at the same, the higher the probability of trend reversal in the near future.
The first thing I look for is a rising volatility index (VIX). This index rises when investors become fearful of stock prices falling be hedging positions or flat out buying put options to profit from a falling market.
Second, I look for a high selling volume ratio meaning at least 3:1 shares traded are from individuals hitting the sell button in a panic thinking that the market is about to collapse.
And last but not least… I look at the GLD etf volume and price action. A surge in GLD volume after a strong move up means everyone is scared and dumping their money into a safe haven.
Let’s take a look at some charts to get a better feel.
GLD Weekly Gold Chart
As you can see there are sizable price movements, which ended with strong volume surges. Those volume surges mean that the majority of investors have reached the same emotional level and bought (GLD) for safety. Keep in mind that the big money players and market makers can see this taking place and that is when they start selling into that surge of buying volume - locking in maximum gains before there are no more buyers left to hold the price up. Tops generally take a few weeks to form so don’t expect a one-day collapse.
The recent rally in gold has taken place when stocks have fallen sharply. Money has been pulled out of stocks and pushed into gold but I think that is about to change.
(Click charts to enlarge)
SPY Weekly Chart
The past month has been a bloodbath for stocks. But from looking at the charts, volume and the fear in the market, I can’t help but think we are going to see higher stock prices. As investors see stocks moving higher, they will pull money out of gold and dump it back into stocks and likely high-dividend paying stocks.
Mid-Week Trading Conclusion
In short, everyone piled into gold sending it rocketing higher and I feel it has moved too far too fast and is ready for a pullback (pause lasting 2-12 weeks). In association with gold’s pullback I feel investors are now realizing they sold their stocks at the bottom of this correction because fear took hold of their investing decisions. Now they are starting to think about getting long stocks but it still may be a bumpy ride for a few weeks yet.