More Carnage: Investors Hurt, But Not Traders

Yesterday we asked the rhetorical question: after the bloodbath, what happens next? Today we got the answer: More! Much more!

But not everyone is suffering equally. Some guys are laughing all the way to the bank.

First the details. Last week the S&P500 index mini-futures (ES) dropped about 135 points in four trading days. Monday it dropped another 135 points in about four hours. This isn’t just a correction; this is a rout.

The ES opened the overnight session Sunday night about 4 points lower than Friday’s close. Then the waterfall began.

After the Asian session opened – badly — the ES dropped 50 points lower to 1911 before the price found some temporary stability. Then the European markets opened, also badly, and the selling resumed. The ES dropped 5% and traded at 1870.

When the regular trading session opened, panic sellers pushed the ES down another 40 points to 1831 before finding support. It then bounced 120 points until noon. Then it dived again, gave back most of the bounce, and closed near the regular session open at 1871.25. Overnight yesterday it traded up as high at 1950.

Up, down, up again, huge price swings all on huge volume. Investors hate this, because they fear — rightly – that when the music stops their portfolio will be worth considerably less than it was a week ago.

But traders – like us – love it. All those swings are trading opportunities, and the bigger they are, and the higher the volume, the easier it is to take our little piece out of the middle.

Some of the traders in our trade group made 72 points per contract Monday, which works out to about $3600 profit for each contract traded. And we are the little guys, the retail traders using two- or five-contract lots. The big boys are trading a thousand times as much. Or more.

So keep that in mind when you read that the market is doomed: despite all the wailing and cries of despair, there is some serious coin changing hands right now. The losers will shriek for help; the winners don’t say a word.

Today

After five days of heavy selling, the ES needs to balance out the oversupply of sellers, and overnight the market bounced a little. Don’t be tempted by the bounce; it won’t last.

The price could go sideways and travel inside yesterday’s range for one or two days to narrow its trading range, but it also could move down further if the market fails to hold above 1828.50.

In that case it will become even more extremely oversold before it bounces again. Traders need to be cautious about shorting at these very low levels. But anytime the ES bounces up above 1920, our traders will be looking for short side entries again.

The major support levels for Tuesday: 1828.50-25, 1803-1799.50, 1775-72;
major resistance levels: 1912-13.50, 1925-28 1950-46.50

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