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A Monster of a Market


That statistical truth tells you nothing about the week's thriller from the financial theater... er, market.


Do you really know me at all? Would you take the time to catch me if I fall?
Are you ever gonna be that real to me? Everything to me.
Lucky I've been through hell, backroads and shortcuts, I know them well.
Baby, just stick with me. We'll make it together, just wait and see.
Everything To Me (Liz Phair)

Hey, what's all the excitement about? If you just got back from Mars, looking at a chart of the S&P you'd be hard pressed to see what the bru-ha-ha is all about. After all, the index closed the week pretty much where it started.

That statistical truth tells you nothing about the week's thriller from the financial theater – er, market.

The acceleration of volatility so long in hibernation, which I warned months ago was going to thaw like a creature from another age, is nothing less than shocking. I can recall no other time over the last 25 years when the markets have behaved this way. Even in 1987, the decline was perceived as a pullback until all of a sudden it wasn't. There were a few bad days going into Black Monday, but essentially the Big Shoe just dropped, kicking most market participants in the butt along the way. It left everyone wondering when the next shoe would drop. It never came.

Click here to enlarge.
A 10-minute chart of Apple (AAPL) over the past sessions shows the extreme volatility.

The current dynamic is more like a Popeye cartoon, where after a can of spinach a lot of shoes at the same time kick a lot of butt in every frame.

The market feels like some kind of Rube Goldberg machine (a fictional, complex device that performs simple tasks in a convoluted way), imploding from the inside out – springs, nuts and bolts flying in every direction.

Over the last week the market has resembled a boxer taking a right hook, a left hook, another right hook and another left. The bell rings and the market comes running out of the corner seemingly re-energized only to see the blood fest at the repeat again.

How long can this brutal volatility pulverize market participants until they throw up their hands like Roberto Duran and say, "No más"?

They say volatility is a trader's best friend. However, you'd better have the West Coast distribution for discipline if you want to capitalize on the opportunity this Creature from Volatile Island is presenting.

In my book, Hit and Run Trading, I wrote:

"This is not an easy game, especially when a major market move ends. There are probably fewer full-time professional traders in this country than there are professional athletes. You must be prepared to work as hard and to be as persistent as a professional athlete to become truly successful."

And athletes don't play everyday. Remember that when you suit up this morning, don't try to slug it out with the market. Pace yourself and take your best shot. Wait for your pitch.

Although it is easier said then done, it is important not to get overwhelmed by the velocity and volatility dominating. It is important not to get caught up in the pandemonium. It is important not to let the whipsaws whip you and whip you around until you are so exhausted you have lost sight of your trading plan and the bigger picture. As Todd often says, "Breathe, Minyans". Loosen the grip on your turret; you don't have to shoot at everything that moves when it's moving this rapidly.

Consistent trading is not about executing a lot of trades. Solid trading is about observations and executing set-ups that have an edge.

Hoofy will tell you that the S&P has successfully tested last Monday's lows and that stocks are poised to charge forward as they did after the March low.

Click here to enlarge.
A) Note how the undercut of the August 1 low (A) is similar to the pattern at the March low (B).

The S&P did stabilize on Friday, closing near the top of another wide range day, while the close of the week was near where it started. So the idea of at least short-term stabilization is warranted. Additionally, the Fed intervened massively on Friday – more than during 9-11. Moreover, it wants to see its operations stem the tide and stabilize the market. Even if the Working Group thinks it would be healthy to allow the market to correct and clean the wound of the credit issues, it does not want to see panic in full force. Consequently, probably the best way to punctuate Friday's Fed operations would be to work the pit Sunday night. That appears to be playing out.

Additionally, if funds simply stop obliterating bids it would not surprise me to see the DJIA rise 400 points in a day or so.

However, Boo reminds us that Friday is option expiration and that last Thursday was a big washout just as July 12, the Thursday the week before, options Friday was a big up spike without follow-through.

Boo reminds us that it is also interesting to recall that the largest one-day gainer in the DJIA occurred a week or so before Black Monday in 1987. It occurred well off the high in 1987 and was an approximate 3% gainer. It convinced the Street that a correction low had been installed which echoed the pattern from five months previously. It is uncanny how similar the current pattern of the DJIA is to that of its February/ March correction five months previously.

Click here to enlarge
On Friday (B), the S&P held Monday's lows (A) and "Tailed" up which suggests the attempt at a Snapback Rally.

A 3% up day would see a 400 point or so gain. Whether or not that is how Monday will in fact play out it is impossible to hazard a guess. But, two things can be said:

  • If Friday's low was the test of a first leg down, then A-B-C retracement or a 2-Step Snapback could see the S&P back to 1490ish.

    Click here to enlarge.

  • A break of last week's low should signal a Waterfall Decline.

The Fed may intervene. The Fed may cut interest rates. But, you have to ask yourself the question: did 1/4% interest rates in Japan halt the unwinding and liquidation when its banks and real estate market imploded in 1990?

Editor's Note: Want more of Jeff's insight and trading ideas delivered to your inbox daily? Minyanville is proud to announce that we will soon be launching Jeff Cooper's Daily Market Report, complete with Jeff's day trading and swing trading setups. Email Josh Sander to be notified when it launches so you don't miss one report.

No positions in stocks mentioned.

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