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Chart of the Day / Buy the Fear: Never Panic at the 50-Day

Buy the Fear: Never Panic at the 50-Day

May 1, 2018

Volatility was alive and well in early 2018.

After a stellar, explosive run to 26,500 in early 2018, we sank nearly 3,000 points to challenge the psychological line in the sand at the 50-day when all was said and done.

Granted, the Dow could always catch triple bottom support and turn higher.

But with fears of midterm elections nearing, tensions were high that markets wouldn’t even hold that line of support.  Should that support also fail, noted analysts, a drop to 23,242 wasn’t really out of the question.

The last time we fell below the 50-day was in late 2015, early 2016, the Dow fell from 17,750 to 15,500. The time before that, the Dow fell from 18,000 to 15,500.  And the time before that, the Dow fell from 13,000 to 6,500 in the subprime fiasco.

While it’s a scary development, we have to remember that markets are also resilient.

Once fear subsides, upside has historically been significant.

How your portfolio performs in these times of panic often depends on you, though.

Do you panic sell and run? Or do you wait out the fear and hold?

Oftentimes, it’s those that wait out the fear and hold that do the best, thanks to the resilience rallies that historically follow.  Let’s go to the sell off from 17,750 to 15,500 for example.  At the peak of fear, the Dow Jones fell to its lower Bollinger Band (2,20) with severe bearish extensions on relative strength (RSI), MACD and Williams’ %R (W%R).

In August 2015, the Dow plunged to its lower Bollinger Band at 15,500.

But fear was out of hand. Not only was it at its lower Band, RSI had fallen to less than 30.  MACD was at a historic low.  Williams’ %R was deep in oversold territory.

Shortly after, we rallied.

After a massive drop to March 2009 lows, fear was way out of control.  But at its lower Band with oversold reads on RSI, MACD and Williams’ %R, we staged a significant rally from 6,500 to a recent high of 26,500.

Remember, even in absolute times of panic, money can be made.

  • As even Warren Buffett will tell you, “Be greedy when others are fearful.”
  • As Baron Rothschild would tell you, “Buy the blood in the streets.”
  • And as Sir John Templeton would tell you, “Buy excessive pessimism.”

Don’t fear the markets on sell offs.  Wait out the fear and take full advantage.  The worst thing you can ever do in a pullback is panic sell.  Then, you’ve truly lost.