Thursday May 6 was an odd day in the markets but perhaps not as odd as some may suspect. We pointed out a week earlier how the Dow Jones was pushing some pretty significant resistance, the 61.8% retracement level of the move from the 2007 high to the March 2009 low. The Dow touched that level and failed at the end of April (see chart below).
Add to that an odd consensus between bears and bulls of a significant downturn. Many bears were thinking we were at a historic high and ready for a reversal as the economy is poised for a double dip recession. Many bulls, realizing the market cannot go up forever and seeing that the S&P 500 rallied more than 80% from the March 2009 lows, were expecting a correction, a significant correction of at least 10%.
Now throw in to the mix the problems with Greece and the threat it extends to the other PIIGs (Portugal, Ireland, Italy and Spain) and the Eurozone as a whole. That brings flight to quality buying into the U.S. dollar and Japanese yen, which causes the unwinding of some carry trade positions that may be bankrolling some of these equity positions.
Oh, add to that today is the unemployment report day so many people already expecting a correction may be getting out or tightening stops for fear a bad number could cause a major drop.
And yesterday was a bad day. The S&P 500 was down about 34 points and the Dow about 250 points before things got crazy. There were a lot of people, bulls and bears alike ready to push the sell button.
There are numerous reports that a fat fingered error, involving Procter & Gamble caused the carnage. That may be true. Equity exchanges have busted some of the unusual trades though the CME Group stated “We did not experience technology or systems issues associated with trading activity between 1:00 and 2:00 p.m. CST” and no trades we busted.
What also is true is that is was the worst possible time for such a mistake given all of the factors that had traders on edge and ready to dump.
Even with all of that, the exchanges have to ask what happened to the liquidity. Large liquid markets should not go down that far that fast. In some markets there are participants that are remunerated for providing such liquidity. What happened to those folks as it is obvious, in the parlance of the floor, a lot of market makers put their hands in their pockets.
The move creates problem for technical traders as is the case when an error causes markets to hit extreme levels. How do you treat prices? Whether it was caused by a mistake or not the technical damage is done.
We are curious to know what you think.
I’m still trying to figure out what happened yesterday and I don’t think I ever will. It has been reported a huge mistake was made which created yesterdays fiasco. I will tell you this, in my report to subscribers last night, I found that in all cases, major indices and futures markets stopped going down in the right place implying there was universal symmetry. As with many things concerning Wall Street, I keep a raised eyebrow on anything reported on television. In sports, mistakes are simple to correct. We have instant replay. The ref blows the call, they go in the booth, rewind the tape and everyone is happy. They find the puck crossed or did not cross the line and they adjust the score accordingly. In this case the technical trader has a unique problem as to how he should look at the pattern. It probably affects me more than a lot of people because I use specific ratios to balance price and time. I MUST have the correct number of points and time bars on every leg. There’s 2 things going on here. Since P&G is part of the Dow, my calculations for the Dow yesterday showed perfect symmetry. That means I will consider the Dow stats like any other day. But then you have to deal with the PG chart. Yesterday’s action created a generational low. IS IT VALID? My question is whether it’s a bad tick. We throw out bad ticks just like sports leagues reverse calls. If this was a ‘bad call’, will the league reverse the call? Will they adjust it? If they do, great. But my feeling is they won’t. If this truly does turn out to be a case where the ‘league’ acknowledges the mistake and we’ve seen the NFL apologize for a ref’s bad call on Monday morning but nothing they can do it about it. They did nothing about it for years until they enacted instant replay. But if the powers that be tell us a mistake was made but they’ll do nothing about it, technically, this is going to have to stand. You are going to have to include yesterday’s statistics in your calculations.
I might not like it and you may not like it. And if you ended up on the wrong side of this fiasco you certainly won’t like it. So much of this business comes down to trust. I’m sure this raises all kinds of trust issues at a time people don’t trust Wall Street anyway. You have the right to look at the data, not trust it and never trade PG again.
But there’s another thing you can do if you want to dig deeper. You go to an intraday chart and take the last print prior to the event and count that as your low. See if the calculations make sense. It requires more work but as a technician you take both sets of statistics and see if the numbers add up. Markets have a universal rhythm and sooner or later they will react to what is correct. Markets have a way of making their own adjustments. It may take me a while to get to the truth simply because universal symmetries don’t lie. When those symmetries start to kick in we’ll know exactly how look at yesterday’s action.
[...] fact, one of our technical analyst contributors commenting on this noted”… I found that in all cases, major indices and futures markets stopped going down in the [...]