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#1 Николай Степенко

Николай Степенко

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Отправлено 17 Август 2011 - 20:00

“The market crawls up the stairs, then leaps out the window.”
— Chuck Le Beau quoting classic market wisdom

I first heard that quote from my friend Chuck Le Beau when we taught a System Development Workshop many years ago. Chuck has done so many interesting things in life and in the markets. He seems to have an anecdote for almost every situation. While his observation that markets crawl up the stairs only to jump out the window was made years ago, he might as well have been looking at the chart below of the current S&P 500 Index.Прикрепленный файл  538-chart-1.jpg   37,04К   0 Количество загрузок:

Far beyond the financial press, the consensus among talking heads on TV, mainstream newspapers and even local papers is that the plummeting market is a proposal for the end of the world. And by some sentiment indicators, buyers and sellers are acting like this is financial Armageddon, Part 2. This is the hysterical part of what’s going on today.

But rather than getting caught up in the hype, let’s look at some historical context for our situation to provide us with a little bit of perspective. Then, we’ll go through a bit of analysis to see where the markets might go from here.

Some Historical Perspective

On Monday and Tuesday, the market had huge moves. After the dubious announcement on Friday evening by Standard & Poors about downgrading US debt, Monday started with a big gap down and the selling continued for most of the day. Though the bears have decisively won the battle over the last 2+ weeks, both the bears and the bulls have won various offensives during the period:
On Friday, there were 12 moves in the S&P futures contract of 12 points or more (either up or down).
On Monday, in the last two hours of the regular trading session, there were 3 moves of 30 points or more.
The real topper was Tuesday afternoon: after the Fed statement, the S&P initially dropped 47 points in 30 minutes only to be followed by a violent snap-back rally of a stunning 78.5 points in the last 75 minutes of trading.

For perspective, the S&P futures spent 60% of the time from mid-December through mid-February with its average daily range below 12 points.

So the past couple of weeks truly have been a traders’ market.

Long term investors and antiquated buy-and-holders have taken it on the chin. From the July 21st intermediate top to Tuesday’s low (August 8th), the S&P 500 cash market lost 18.2% of its value. The number climbs to a 19.6% drop if marked from the 2011 high made on May 2nd.

Add this to yesterday’s (August 9th) massive drop then rise and you have evidence of hysteria. The Dow Jones Industrial Average (which is still the most widely reported index by the media) had a 622 point range yesterday. And while that is huge, it is hardly unprecedented.

Using historical data from the Yahoo! database, I looked back to October 1, 1928 to compare present day to prior monster moves. Out of 20,808 days, Tuesday’s range was the 26th biggest in terms of absolute number of points. But less than three short years ago, in October 2008, there was a run of 10 straight days with a daily range greater than we saw yesterday.

Really though, absolute values mean little when comparing historic data. If we look at yesterday’s range on a percent basis, it was 6.13% of the previous day’s closing price. Again, that is huge, but this move places it only 160th overall for daily range as a percent of price.

So Where Do We Go From Here?

You may recall that in mid-June, we looked at some analysis that showed the oversold markets were due for a rally. We got that rally and the markets then stalled twice right at a “market memory” target that I suggested in a subsequent article. I also said in June that the rally from the 200 SMA support was likely to be weaker than the rally that led to the May highs. Indeed it was. Here are the same levels shown from the earlier chart with up-to-date market data.Прикрепленный файл  538-chart-2.jpg   51,95К   0 Количество загрузок:


For the downside, there are really no good support levels from market memory points until we get down to 1039 on the S&P 500 cash chart. This was the area of the August 2010 lows that formed a take-off point for the big rally into November.  However, getting down to those levels is not likely without significant new financial problems arising.

During the last five trading days, the market hit such extreme oversold readings that Tuesday’s end of the trading day spike up was growing more inevitable by the minute.  Since that relieved some of the ultra-extreme oversold readings, our most likely scenario for the short term is a consolidation period for at least a couple of days.  Volatility will wane, perhaps in a big way if the news stream quiets down and traders both in the US and abroad can finally go on vacation.   In the absence of big financial news out of Europe or the US, the market should rally from here to truly relieve the oversold condition that still exists.  But beware: the launching pad for this type of rally is often a retest of the lows to suck in a few more short sellers. 

Be careful out there and reduce your trading and investing size until the volatility quiets down again.

Great Trading

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