What is an Exhausted Selling Model
The exhausted selling model is a pricing model used to estimate when the floor price has been reached on a security.
BREAKING DOWN Exhausted Selling Model
The exhausted selling model is generally used following panic selling. The model uses trendlines, volume, moving averages and chart patterns to determine when a security price trend may change. This model is most frequently used by investors who trade based off trends and not by following more fundamental practices.
Panic selling can be described as the rapid selling of securities based off short-term events that don’t have any correlation of the intrinsic value of the security. For example, the rapid unloading of gold when the value of gold has not gone down but perhaps gold is in the news for becoming less fashionable and desirable compared to platinum. The gold prices fall but the trading volume remains high. The price floor is likely to be achieved after the rapid increase of selling has slowed or stopped. Once that happens, traditionally there will be an increased number of purchase orders.
While the price floor determinations are up to the individual investor, using more indicators can generally result in a reduction of risk. The exhausted selling model is most optimally used when the drop in price is not caused by material events, like when a stock has been downgraded by an analyst.
What is Panic Buying
Unlike panic selling, panic buying is when an increased demand creates and increased price in an available security. While this is good for the owners of the security, it creates a reduced supply of the available asset, which is bad for investors looking to jump on a trending stock.
Panic buying occurs when there is a rapid increase in the purchasing of a security or asset. This happens when prices are fair, or when unexpected news regarding the asset is released ahead of sales that could have a positive impact on price and trading.
A real-life example of panic buying is the consumer demand for certain goods prior to a snow storm in the northern United States. When meteorologists begin predicting winter storm patterns, grocery stores see an increase in demand for bread and milk. Home improvement and big box stores experience an increased demand for snow shovels and rock salt. In some areas, sales of bottled water rise as buyers worry the storm will bring power outages, and people fear getting stranded in their homes, unable to draw potable water from their wells.