How FGIC performs around the Spike signal

The bars on the chart are colored red when FGIC is -8 or lower (Extreme Fear) and green when the Fear & Greed Composite Index (FGIC) is +8 or higher (Extreme Greed).

The Composite Fear & Greed Index
The Composite Fear & Greed Index

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There is no change this week, as FGIC remains at the lower edge of the extreme greed readings for the seventh consecutive day.

Comparison between FGIC and the Spike signal
Comparison between FGIC and the Spike signal

The Spike signal is a rare yet powerful signal that is triggered in the deepest and most violent corrections when the weekly NH-NL crosses upward of –4,000.  This signal has been triggered three times in the past five years: the figure shows the latest Spike signal at the end of the pandemic-driven selloff, but the pattern described below was the same during the 2016 and 2018 Spikes.

1) The weekly NH-NL drops below –4,000, Spike signal is on standby, FGIC is at -6.  No panic yet.

2) NH-NL weekly finds a bottom and starts to rise.  FGIC diverges as it continues lower and enters extreme fear readings (–9).

3) As Spike Bounce signal (a lesser signal than Spike) is triggered (marked by a black continuous line), price starts to rise, but FGIC remains flat at –9.

4) NH-NL weekly crosses above –4,000, the Spike signal is triggered.  FGIC continues to fall and reaches –11.  Price is up but panic increases.

5) A pullback in the S&P driven by the early profit-taking and continuing panic exiting.  FGIC remains flat at –11.

6) FGIC finally ticks up, joining price and NH-NL uptrends and auguring in the start of a stable uptrend.

In conclusion: markets have to panic before recovering.  The resumption of a stable trend needs panic to decrease, as reflected in this sequence of events, frequently observed at market bottoms.

(This article has been posted on SpikeTrade. Follow FGIC updates on www.spiketrade.com)

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