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A Historical Perspective To Today’s Mini-Crash




This is a guest post by Wayne Whaley, CTA:

After being down 8.58% in the afternoon, we finished the day down 3.24%. I scanned my database for days where we were down 5% or more intra-day and rallied at least a third off the day to finish down for the day. I found four instances. For the intermediate outlook, you could argue that there is actually only two time frames. They were 0-4 for tomorrow, and 1-3 for the next week, suggesting retest of the lows in the next couple of days.

mini crash table 1

The above would appear to suggest that some backing and filling is in order for a couple of days

There are three statistics that I look for at capitulation bottoms:

5 Day ADT < 19.05 where ADT = ADV/(ADV+DEC)
5 Day UDT < 16.41 where UDT = UP/(UP+DOWN)
5 Day SPT < -13.85 where SPT = 5 day % change in S&P 500

The 5 Day UDT is 18.736. The other two statistics are two days away and a close below 1100. ADT is currently 28.33 and the 5 day percent change in the S&P 500 index is -6.5%. You don't have to have all three at the same time. Any one of the above test out well alone, but would be nice to have confirmation from ADT.

UDT table mini crash

Today's down volume was 22.8 times that of up volume. It was the fourth day in the last month where we had four "nine to one" down days. There have been no "nine to one" up days since March 5th, just over two months ago. The results were inconclusive, suggesting some more volatility. Here is what happens when we have 4 "nine to one" down days with no "nine to one" up days over a 21 day period:

nine to one day table mini crash

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12 Responses to “A Historical Perspective To Today’s Mini-Crash”  

  1. 1 WW

    I was looking at my four cases that identified yesterday, where the market was off 5% intraday, but recovered at least 1/3rd of the loss before closing down for the day, and I noticed that in all four cases you retested the lows within 1 to 5 days. Of course four data points is not a lot insight and there is the possibility we 'V' out of here, but I'm inclined to think not so.

    Recall from above, that they were 0-4 for the next day, and 1-3 for the next week.

    There is the thought that yesterday was simply an anomaly related to order entry error. But after sleeping on it, two thoughts are on my mind. 1) Would not the market recovered the all of the losses, once the order was reversed and 2) Why is Asia off 3% on an anomaly

    Some of my other work, suggest the intermediate trend is still forward and I think we make new highs before the year is over, but not until we go through the proper bottoming process

    But who knows.

  2. 2 jezza

    Many thanks WW, 9-1 sell days, high volume on the sell days, sell days when the news is good, i.e good private sector employment, indicate that the correction still has legs short term in my view.

    Sentiment will have to become much more bearish again, valuations more reasonable, before a resumption of the bull market.

    No V recovery, bottoming out some 5% below where we are now over the summer, with a strong year end recovery with new highs being made in 2011!

    Buy and hold for equity investors through the storm.

  3. 3 Wes

    Of the 4 cases Wayne found, all occurred during established bear markets. I'd be careful in taking these as precedents for our current situation.

  4. 4 Wayne W

    Wes,
    did you notice that of those 4 cases we referenced earlier that we now have all five (including last week) that were followed by a down day?

    But your comment is what I, and many others, have been in a quandry over. That being, that although last week looked similar to a lot of capitulation bottoms, it was recorded much closer to a top than most previous similar such trading weeks. Other studies I have done show that capitulation bottoms have very similar breadth and volume characteristics that occur over a 5 day selloff. Not unlike last week, (especially if Monday is down). When I look at these capitulation bottoms, most, but not all were bear mkt bottoms. But the bull market corrections in Oct of 78 and Aug of 90, show some similarities to this correction in terms of breadth and volume characteristics. I need to look at those two a little more.

    I think I will know a lot more after Monday. In a different study (Babak, it is in your email) the last nine times the previous week was down more than 5% and the Friday was down, the following Monday was down, some sizable. Nine in a row, mind you. If the mkt could do the unthinkable, but possible, and muster a retest of the lows on Monday, I think it would have the earmarks of bull market correction bottom. The Tuesday's after these Down weeks-Monday selloffs show turnaround Tuesday characteristics. This would clear things up for me.

    When I find myself in a quandry, I like to put all the pluses and minuse down on paper and weigh the evidence. I have these in my head, but will share if I get a chance to scribe them. I need to be at the office where I have all my datafiles, but a few thoughts off the top of my head, forgive any modest inaccuracies. And I want you to keep in mind that I am short the market on Monday and I don't really care which side of the mkt I make money on. Some rambling thoughts.

    Everyone has forgotten, but the month of January was down, All of sudden, the January Barometer, which has something like a 75% record at predicting the rest of the year, has a shot at a win this year.

    The really bearish deal we had going on were the sentiment numbers. 3-1 bulls to bears at II, five year lows in equity putcall ratios, Vix at three year lows, was an accident waiting to happen. It may take a couple of weeks for those numbers to reflect the new fear, but nothing like a good ole 8% intraday selloff to shake the undecided's up a bit.

    When you look back at 10% selloffs, the ones that tend to evolve into 12-24 month bear markets are the one's that drift down over several months without a lot of fanfare before gaining momentum and eventually collapsing. Short quick pullbacks have more of the characteristics of a bull market correction.

    There is talk in some circles that bear market bottoms end with single digit PEs, but you have to go back to the 50s to find a bear market bottom with single digit PEs and abnormally low interest rates. My opinion is that given interest rates, earnings trends and LEI trends. the market is actually a bit undervalued. I have a study somewhere that says when average interest rates across the yield curve are below 5, PE's avg in the low 20's and we are something like 18.5 at the present with a steady trend of upward earnings and monthly LEI #s as a tail wind.

    And then the tape. Just looking at the last 12 months, One of the most powerful tech tools we have is the 10 day breadth thrust. We had 10 day Breadth thrust in July & September of 2009 that are still in play. We had a 20 day Breadth Thrust in March of 2010, which doesn't get as much attention from technicians, but has as bullish a forward intermediate history as the 10 day. If we get some capitulation bottom signals this week. That would give me 4 bullish thrust signals in a one year period, which I would not want to bet against.

    Need to take Mom out to breakfast in the morning and will try to do some further study tomorrow afternoon. Will share if I have an epiphanny. later,

  5. 5 jezza

    Many thanks Wayne.

    Next week should tell us if it was a final capitulation or the middle of a bull market correction.

    My tape reading skills suggests to me the latter.

  6. 6 Wes

    Interesting thoughts, Wayne. I agree that we'll have a retest, but I'll be surprised if it's as early as Monday.

    I base this on the short term overbought/oversold indicators being short term oversold, but the 21 and 30 day being neutral. A return to the upside without the longer term indicators going oversold seems to me improbable, though of course possible.

    I'm looking for a bounce and then a retest, but as always intend to play the market as it happens.

    The "Planes, Trains and Automobiles" paper is excellent. Congratulations on your well deserved award.

  7. 7 WW

    Wes,
    Calling for a 5% selloff on any given day is a longshot, but given the last 9 Mondays in this spot (following a 5% down week, with a down Friday) have all been down by an average of 2.4%, I just mentioned that it is not out of the realm of possibilities. I'm at the office doing some studies that I think will give us some more insight, check back tonight.

  8. 8 Wes

    Wayne,

    Thursday's trading was such an anomaly, I wonder how much faith we can have in its' even being a "testable" low. It's occurred to me that the real low may be just being formed, and it is the low that will be retested eventually.

    By "real" low, I'm thinking of the low that would have been formed in the absence of technical trading abnormalities.

    Thoughts?

  9. 9 jezza

    Technically if a stock makes a sudden and unexplained spike or drop, and then immediately recovers, it tends to suggest where the stock will inevitably go.

    Same goes for the stock market-sadly another drop is coming after a over sold bounce.

  10. 10 WW

    lean toward jezza

    regardless of the circumstances, creates psychological levels that should be revisited. I find the bulls leaning toward the anomaly theory. trying to wrap up some stuff to send to Babak for post. Watch openings in Asia in a couple of hours.

    If you were around in 87, all the talk shows were covered with analyst blaming derivatives and computer trading for the collapse. It's like Gecko said in 'Wall Street', the indexes were blasted because they were subject to being blasted.

    Most traders don't give a crap about all of this stuff and hope to be on the their share of these moves. Out of chaos comes opportunity, study it and get on the right side.

    The retest can come so fast that most casual observers won't even notice, could even be up by the end of the day. Some detailed analysis later tonight

  11. 11 jezza

    Here comes the over sold bounce here in London, expect the US to follow-watch for low volume on the rise to confirm this week.

  12. 12 ww

    Not much sleep to be had here tonight. Started buying when globex opened up Sunday night and adding all night.

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