Howdy folks,
If you’ve been trading for any length of time, you know the market has a bad habit of overreacting — whether it’s panic selling on bad news or piling into stocks on a hype-fueled buying spree.
We’ve seen it time and time again: a headline hits, traders scramble to react, and prices swing wildly — only to settle back to reality days or even hours later.
I’ve got a rule of thumb for these situations: The first reaction is usually the wrong one.
Take what happened a couple of weeks ago, for example… Remember Monday the 27th?
Markets dumped off, overreacting to “DeepSeek AI” headlines out of China. But within a few days? The same stocks that got crushed were bouncing back.
Why does this happen? Because traders get caught up in emotion — not logic.
The key is learning how to recognize overreactions and using them to your advantage.
If the market panics too hard on bad news, there might be a buying opportunity.
And on the flip side, if it jumps too high on hype, it could be time to take profits.
How to Spot an Overreaction in Real-Time
Markets move fast, and it’s easy to get caught up in the noise. But here are a few signs that the market might be overreacting:
- Extreme volume spikes – If trading volume suddenly explodes after a headline, it usually means herd mentality is in full effect. Watch for signs that the buying or selling is losing steam.
- Price moves way beyond historical ranges – If a stock, index, or commodity jumps well outside its usual range without new fundamentals to back it up, odds are the move is exaggerated.
- The “snapback” effect – When a stock drops too far too fast, watch for a sharp recovery — especially if institutions step in to buy the dip.
These moments create some of the best trading setups, whether you’re looking for short-term trades or longer-term positioning.
Over-reaction in Big Tech Earnings
This kind of overreaction isn’t just in broad markets — it happens every earnings season, too.
Think about how many times we’ve seen a stock soar or tank after earnings, only to reverse the next day once traders have had time to digest the numbers.
It’s why I always caution traders: Don’t rush in right after earnings. The real move often happens once the dust settles.
Final Thoughts
At the end of the day, overreactions are part of trading—but they don’t have to catch you off guard. Recognizing when the market is acting on emotion instead of logic can help you stay ahead of the crowd.
Stay sharp,
—Geof Smith
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