Exhausted Selling Model

DEFINITION of 'Exhausted Selling Model'

A pricing model used to estimate when the price floor of a security has been reached. The exhaustive selling model uses trendlines, volume indicators, moving averages and various chart patterns to estimate when the price of a security is going to reverse course. This model is most frequently used during periods of panic selling, and is used by investors who are trading based on trends and not necessary fundamentals.

BREAKING DOWN 'Exhausted Selling Model'

The exhaustive selling model is best suited for scenarios in which both the price of a security is rapidly falling and trading volume for that security is high. When these two factors are occurring, the likelihood is higher that investors are panic selling, since panic selling may be triggered by short-term events that do not impact the intrinsic value of the security. This model works best when price drops are caused by non-material events, such as a stock being downgraded by an analyst.

A price floor is likely to be reached when a spike in selling order volume that results in a new price low slows down, and is met with increased buy order volume. The predominant downward trendline must also be broken by the price leveling out, and the 40/50 day moving average must be broken and reset.

While the number of indicators used to estimate the price floor are up to the investor, using more indicators typically reduces risk by confirming the likelihood of a price floor across different indicator types. 

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