Like clockwork the reaction is always the same; there is never any variation and the top players use this to their advantage. Take a look at any so-called market crash or financial disaster and you will see that the markets recovered from each and every one and recouped all the losses and then some in the process.
Let’s look at one of the most commonly followed measure of fear in the market; the VIX.
VIX has been trending upwards, but it has not spiked up yet; there is a possibility it could follow the path we have outlined in the red line (look at the second chart). However, even if it does surge upwards, it will trend down towards the new norm, which falls in the 12-18 ranges. While it is hard to think straight when panic is in the air, this is precisely when you should force yourself not to react and give into panic. When fear governs a person’s actions, the outcome is nearly always unpleasant.
Take a look at a five-year chart of the VIX. What stands out immediately is that every Spike upwards was short lived, and shortly after the spike up, the VIX has traded in the low ranges for an extended period.
For the past five years, the VIX has traded in 12.5-20.00 ranges; the upper range is 2 points wider than the one year chart. This picture clearly illustrates that giving into panic does not pay. You have a clear pictorial representation illustrating exactly when the Crowd gives into panic. A spike up is associated with a strong pullback and vice versa. Note how much time the VIX spends in the low ranges. Low VIX readings correspond to higher market prices and vice versa.
In this chart, we have laid out the probable path we think the VIX is likely to take. Even it does spike upwards, instead of panicking we would view this as a positive development. History indicates that after a spiking upwards the VIX always pulls back and spends more time in the lower ranges. Lower reading usually correlates to higher market prices and spikes usually correlate to market bottoming action.
Which one would you rather play; a correction that begins and ends suddenly giving you little time to react, or a nice upward move, that lasts four times as long and gives you ample time to jump in and or out. We are not making this up.
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