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Chart of the Day / The Best Time to Buy Excessive Fear

The Best Time to Buy Excessive Fear

April 10, 2018

The best time to buy fear is when there’s too much of it.

But who in their right mind can tell when there’s just too much?

Honestly, any one can.

You just have to know what you’re looking for with over-extensions on the Volatility Index (VIX) along with its upper Bollinger Band (2,20) and Williams’ %R.

For example, notice what happens the moment the upper Band is hit or penetrated, and Williams’ %R runs above its 20-line.  Not long after, the VIX pulls back and fear begins to subside, leading to opportunity on the long side of the market.

For example, on March 23, 2018, the upper Band was penetrated, as Williams’ %R jumped above its 20-line.  The moment that happened, fear began to fade, at least temporarily, giving way to a Dow run from 23,509 to a high of 24,622.

On February 5, 2018, the VIX spiked to a high of 38.8 just above its upper Band.

At the same time, Williams’ %R was above its 20-line.

Shortly after, the Dow Jones would run from a low of 23,923 to 25,800.

Granted, none of us can ever know how long a rally will last following fear, but there’s a good chance you can make money by trading excessive fear.

But what’s the best way to trade fear when every one else is running away?

While keeping a level head and by ignoring the noise of the market, you could always take a long position in any one of the following trades, including:

  • The SPDR Dow Jones Industrial Average ETF (DIA)
  • Power Shares QQQ ETF (QQQ)
  • SPDR S&P 500 ETF (SPY)

Or, as we recommended yesterday afternoon:

  • Buy to open the DIA May 18, 2018 242 calls, which traded at $5.75
  • Buy to open the QQQ May 18, 2018 160 calls, which traded at $3.80
  • Buy to open the SPY May 18, 2018 264 calls, which traded at $4.80

Most of the time, when the VIX soars too much too soon, opportunity can be found in on the contrarian side of the market.

Simply long trades such as these, wait for the likely bounce, and take your wins.

Then, when volatility and fear get out of hand again, you wait and repeat.

Helping to cool volatility a bit is news that a trade war may never come to be.  In fact, Chinese President Xi Jinping just promised to lower import tariffs on products, including autos, helping to soothe jitters.  “His comments seem to have covered all the major issues the US has raised, including intellectual properties and liberalisation of domestic markets,” said Yoshinori Shigemi, the global market strategist for JPMorgan Asset Management, as quoted by ABC News.

Still, even with soothed fears, never let your guard up in this market.  Always stay protected.