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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.
Volatility has been severe in 2018.
After watching the Dow Jones Industrials explode from 24,809 to a high of 26,616, the bottom appeared to fall out starting February 2, 2018, as the Dow fell 665 points.
The Dow would fall another 1,175 points on February 5, and another 1,032 points on February 8, 2018. On March 1, 2018, the Dow would fall another 420 points.
One of the worst things that traders still do to this day is ignore stocks at 52-week lows, even when it comes to the biggest stocks in the world.
But to be honest with you – that’s exactly when you want to buy. When everyone else is selling and becoming fearful of big named stocks, buy.
The question then becomes – how can we tell where the bottom is?
We simply abide by what herd mentality and momentum is telling us, which we can decipher using several technical indicators and fundamental analysis.
In early 2018, the reins of the Federal Reserve were handed to Jerome Powell.
With it, came concerns the central bank could raise interest rates.
Of course, it had many on Wall Street terrified of a potential market downturn like we saw at the start of February 2018 and again in March 2018.
All of a sudden, there’s a gap in the chart of your favorite stock.
Surprise news, earnings, something unexpected caused a bout of extreme optimism or pessimism that resulted in the move.
Look at Palo Alto Networks (PANW), for example. In early June 2017, shares closed at $118.59. However, shortly after the close, news of a massive cyber attack began hitting headlines. Orders come flooding in overnight. The next day, the stock opens at $140.
It’s always interesting listening to fundamental and technical analysts argue.
Just as fundamental investors like to laugh at technical analysis, technicians laugh at the absurdity of investing just on fundamentals. It’s a never-ending, laughable fight.
Fundamental analysis shows us what’s under the hood, and whether or not an asset is over- or underpriced, as compared to the competition. In fact, Warren Buffett, Baron Rothschild and Sir John Templeton subscribed to this school of thought and made a fortune. They seeks to uncover the intrinsic or true value of an asset, and is dependent on future sales, earnings, and estimates. It’s pain-staking research at times.