The biggest panic sales usually come after the biggest trends. During the trends, down moves remain limited for a long time. Because of human psychology, the perception of rising forever is starting to take shape for the markets. After some time all down moves trigger dip-buying action. As the rumors of big profits spread, more traders will try to catch the dips, after some time, people with no trading experience start to invest with the hope of big profits. At first, some analysts warn about overextending prices but as the surge continues, they too feeling left behind and join the trend.
When prices extending the all-time highs almost every day, fundamentals showing too high valuations, and even the most conservative analysts don’t want to write negative papers, the decreasing momentum may not worry a lot of traders. New, inexperienced traders will come to invest every other day and cause markets to hold above key levels. As the chart turning flat, almost everyone continues to “hodl”. It is then the professional traders will start to decrease their positions as subtle as possible. Some weak voices about big fall will be heard but most of the news will be about new future ATHs and insanely big expectations.
Next, momentum starts to turn negative and most of the early trenders start to decrease their positions. The balloon is losing air and big investors liquidizing their positions. Inexperienced traders may try to hold their position or even may try to increase them in order to decrease their averages. But with the breaking of a key psychological support, many leveraged positions will be closed and a sharp fall will trigger more stops and the market will panic. Everyone wants to liquidate their position as fast as possible, sometimes even without looking at the price.
We all heard this story many times. Every big panic sale may be different from each other but the principles are almost always the same. Everyone will think that it is all over and markets cannot rise those levels again but most of the time it will again in a couple of years. New big trends will be formed and new panic sales will happen. The recent crypto crash was a perfect example of that. But which markets will be next? Nasdaq perhaps?
To better understand panic sales, let’s start with two of the previous ones. The big gold crash in 2013 is my first real experience as a semi-pro trader. Since the 2008 market crash gold surged for years. The trend is formed over the 144-day moving average from 2009 to 2011. From the all time high of that time, gold start to flatten and the 144-day moving average had lost its trending power. The prices consolidate for almost two years before breaking the key horizontal support that keeping the topside move. With that, gold fell almost $200 in two days and entered a bear market that will last years.
The most recent panic sales, bitcoin trend above the 50-day moving average and surged over %500. But with the loss of momentum, bitcoin starts to price below the moving average and creating a top. Sometime later. With a key support’s breaking, the price of bitcoin fell from 50k to 30k in a couple of days.
Nasdaq has been trending above the 100-day moving average since the Covid-19 crash but recently pricing below the moving average and losing momentum. But still, some key supports holding. There is no simple way to determine which support needs to break in order to trigger sales but around 12500 will be a good candidate. Of course, until fast sales start below key levels, we can’t predict if it is going to happen or not.
I will not enter the fundamental side too much but just for understanding basically, the PE ratio is x88, above +3 standard deviations above the 10-year average which was already really high. The best analyst average forecast for 2021 is around the 10-year average which means really big earnings are expected this year but for me, it may be a little too optimistic.
Nasdaq was already pricing before the Covid-19 and now pricing at an insane level. Market Cap/GDP, which is known as “Buffet Indicator” is around %200 and no one can justify the x88 PE ratio. Bond rates are expected to go over %2 or maybe even %2.5. FED will probably start tapering in early 2022. Most importantly the possibility of higher capital gains tax may trigger profit-taking action for big accounts.
Despite most negative expectations that I said in the paragraph above, there are a lot of positive fundamentals too. Biden’s infrastructure program will kickstart the already recovering economy, fiscal stimulus packages create a lot of saving for households that may join the economy as Covid-19 restrictions ending, fast economic recovery and higher inflation will both support the stock prices (ignoring the tapering) and Nasdaq’s long term chart almost always showed an uptrend.
Considering all the positives and negatives, it is not clear that we will see a break and a big panic sales. Even if that happens it may take a lot of time before and crate a whipsaw action around current levels. 12500 level may become a key level for the sell signal. As long as the price stays above that level, we can’t talk about a possible crash. But if that happens, hodling your positions are a dangerous thing to do, especially using when using high leverages, so be careful. It may not be clear where it ends when a panic sale begin but the possibility of taken advantage of a big fall and collecting assets from cheap valuations may be a too big opportunity to pass by.