Dear Subscriber,

So this is what the second largest NYSE volume day looks like? One trillion dollars in market cap was reportedly lost at the peak of today’s down-trade. We will all have war stories to tell about this day for a long time to come. There have certainly been signs during the last two weeks, which we have discussed, and this morning as well, but that afternoon session was something to behold. And yet, anyone who tells you that they expected a 1,000 point down day is either blowing smoke or is a “see I told you so” perma-bear. Well, now everyone has had a chance to be “right” during these last two months.

Going into the day, there was good reason to believe that the 38.2%, or at least the 50% retracement might hold. Erroneous trade rumors aside (awfully convenient), that is indeed where we closed, just below SPY $113. With price action broken and the 200-day moving average for the SPX conceivably in play, a greater than usual level of importance will be attached to news in the days ahead, including:
  1. The Jobs Report (+187K/ 9.7% unemployment rate expected)
  2. UK & German Political Elections
  3. The Vote of the Greece Bailout

There is also the question of what this move does to investor sentiment, and it’s impact on tomorrow’s open. Not unexpectedly, the overseas trade continues to take it on the chin early this evening, but I also see currencies beginning to stabilize as Japan pumps liquidity into its system to keep pace with demand. For tomorrow, we hold a bullish signal stance, although, interestingly, the bias has moderated somewhat. Most importantly, we ran so far as to go into a “non-normal market” state today and the modality of our ETF Ranks are once again showing a suspect split nature. In support of the bull signal; however, we also see a bullish VIX:VXV reading.

Back to war stories, as our chat members know, I got lucky today in spite of fighting the tape in the morning, and I especially feel for anyone who had intelligent stops way out of the money hit, only to have the market come back by half. I do hope those trades eventually get canceled or that you had acquired short-side protection when it was inexpensive. This reminds me, every single long in our relative strength model portfolio potentially got stopped out today for a 1.86% loss (unofficial until the weekend). It likewise seems logical that trailing stops contributed to today’s late day acceleration.

If you are in a similar position, recall that mean reversion and relative value mispricing methods generally far outperform as volatility accelerates — and I have to think that these volatility clusters portend further volatility as it works its way in time through the system. However, these methods are subject to overshoot, sometimes significantly so. This can lead to wild equity swings and sleepless nights. Therefore, if you feel compelled to continue to trade through the volatility, two ideas are to: 1) cut back in size until/ hold cash we return to normality/ the trend has stabilized; and, 2) leg-into any counter trades. Just something to think about.

Take a close look at that Fibonacci [attached] and other special charts below, take a deep breath, and hang in there!

Reading:

Very truly yours,
Jeff Pietsch

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Guest Contributor: “Mr. Ice”
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Another bear with shotgun day. I am trying hard to figure out what to write tonight. Deep in my mind I always thought we will get another double dip sometimes this year. China, the manufacturing hub of the world, had being showing the slow down for at least a month and its leading us down just as they led us up. Retail seems to be hitting a peak. I am seeing good earnings sold from SHOO, JNY, DSW, KSS, SHLD, etc…. So a second half economic slow down is being priced in along with European risks and interest rate risks. Perhaps a weak jobs# tomorrow morning with cement the downtrend.

The action today really messes up the charts, but any way you look at them, we are now in a downtrend. McClellan Summation is firmly in a down trend. Volume was huge, breadth was horrible, and there isn’t any good technical support. We may see some counter-trend bounces, but this is a market that has a high risk of further downside in the near term. At minimum some kind of test of the low can be expected.

I find explanations of a bad trade entered hard to believe. No one enters trades with words, they are always numeric, so the “b” for “m” is ridiculous. In addition, most systems have checks on trades that deviate by that order of magnitude, so numeric entry error is highly unlikely. More likely is a software errors or algorithm piling on.

McClellan Osc is back to Nov 2009 levels and VIX spiked to 40. We are so over due a bounce, but the traders who caught the 70 point sp500 rebound would be looking to unload and late to the game home gamers would likely want to get out. A gap down will probably be fade-able again tomorrow morning, but do not think we close in the green before the weekend. This is extremely difficult to write after we have fallen so much but I say give it another couple of days on the down side. Volatility is returning so be nimble, there will be trades both ways.

Item of Interest:

NASDAQ is busting trades that is way crazy on PG today. CNBC breaking news —

NASDAQ OMX Group issued the following statement after the market close Thursday: “NASDAQ reported that we had no technology or system issues associated with the trading that occurred between 2:00 and 3:00 p.m. ET today. Our market close process ran successfully. We have coordinated a process among US Exchanges and therefore, pursuant to rule 11890(b), NASDAQ, on its own motion, will cancel all trades executed between 14:40:00 and 15:00:00 greater than or less than 60% away from the consolidated last print in that security at 14:40:00 or immediately prior.”

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