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Buy the Blood

Posted March 07, 2025

Greg Guenthner

By Greg Guenthner

Buy the Blood

Investors are panicking.

They’re glued to every breaking headline, obsessing over tariff news, political uncertainty, and daily market volatility.

Frankly, the market feels terrible as a result. Fear is everywhere.

But here’s the thing most people miss about fear…

Moments like this – when everyone else is hitting the sell button in a panic – are exactly when the biggest trading opportunities appear.

Traders call this moment “the flush.”

Think of it like a crowded room where someone suddenly yells “fire!” Everyone rushes for the exits at once, desperate to get out, regardless of price.

Stocks plummet, sentiment collapses, and investors throw logic right out the window.

Right now, we’re staring directly at one of these moments.

But if you know what to look for, you can turn other people’s panic into your next big win.

By watching sentiment extremes, carefully tracking key market levels (like the S&P 500’s 200-day moving average), and spotting the telltale signs of market capitulation, you can position yourself for the bounce nobody else expects.

The smartest investors understand that panic isn’t something to run from – it’s something to embrace!

And today, I’ll show you exactly how you can do it…

Step 1: Search for Sentiment Extremes

One of the first things to look for ahead of a flush is sentiment indicators hitting extreme levels.

We've already talked at length about the bearish swings in sentiment, which continue into this week. Despite a slight reduction in bearish responses to the latest American Association of Individual Investors sentiment poll, the number of bulls still sits below 20%.

Translation: investors are acting like we're in the midst of a massive crash, while the averages are currently in what should be considered a normal corrective wave interrupting a larger bull market.

This disconnect is causing a good deal of angst. We've seen a lightning-fast pullback from the highs, so that probably has something to do with it.

Remember, the S&P 500 hit all-time highs just 12 trading days ago! Everyone was riding high on those stocks that went straight up in January.

Now, we're seeing the air come out of many of these former leaders. It's a tough pill to swallow for the average speculator.

Step 2: Know Your Levels

The bears are getting more confident by the day.

But where are some areas where we might finally witness some capitulation that could trigger a reversal?

Well, the averages just so happen to be near a spot where we could see a bounce.

The Nasdaq Composite and S&P 500 are both teasing their respective 200-day moving averages.

I wouldn’t be surprised to see some false moves that fake out the bulls and the bears before picking a direction since we're near this obvious potential pivot point.

To be clear, moving averages aren’t magic lines. They simply give us a cleaner look at the underlying trend.

The 200-day moving average is a widely followed area. We should expect short-sighted traders to sell on a breakdown below this level, allowing more tactical buyers to step in to play a potential rip.

Big rallies often form below these “breakdown” levels once the sellers are exhausted.

Step 3: Mind the Gap

We’ve identified sentiment extremes and key levels. Now, it’s time to search for capitulation.

While there’s no set formula to pick an exact bottom following a steep decline, there are certain characteristics to keep in mind.

Sometimes, you’ll see the averages begin to fall off a cliff in the afternoon as everyone races for the exits ahead of the closing bell. Then, futures are in the dumps early the next morning. Stocks gap lower and wallow in the red. No one wants anything to do with the market!

Then, buyers suddenly show up after the averages have gapped lower. A small rally starts. It begins to grow. Finally, there’s a buying frenzy in the afternoon. The averages miraculously close at the highs of the day, eating into a good portion of the previous day’s losses.

That’s a sign that a reversal is in the works!

Of course, there’s no guarantee the market completely recovers all the way back to its previous highs. But even in a relief rally, there are gains to be made on the sharp move higher.

We don’t know how the market will get over the constant flow of tariff changes and other news out of Washington. But we don’t have to worry about it if we’re focused on sentiment and price action.

Follow the steps we’ve outlined above, and you’ll stay well ahead of the herd when the next rally begins – no matter where it takes us.

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