Getting the most out of Panic Selling

In a situation where the price of stocks start declining at a rapid speed along with high volume sell off leads to panic selling. This mostly happens when investors are forced to re-examine the intrinsic value of the stock, or when the price of the stock is forced down enough to cause persisting stop losses by short term traders.

The occurrence of such a process provides big opportunity to start long term positions for the bottom- fishers especially when the factor behind the occurrence is speculative or non material in nature. Panic selling has been discussed below along with a model provided to judge the right time to take the long position, after panic selling takes place.

Stages of Panic Selling

There are several phases involved in a panic selling process. In the first phase the price of the stock is observed to decline rapidly on high volumes because of several factors. The second phase observes sudden high volumes where sellers and buyers try to take control of the trend.  Low follow up volume trend is taken by the winner. If no change is observed in the second phase then there is a possibility of the occurrence of a substantial reversal (short or long term) in another high volume point which generally takes place in the third phase. Until the establishment of a trend of long term backed by confirmation of fundamental or technical factors, the same process continues. [click to continue…]

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