If you were long today trading S&P futures or Dow futures, you learned the benefit of using stops. Luckily, the market rebounded and it seems that many trades in individual stocks, P&G to be specific, will be limited on the NYSE to a low of 56.
In the futures market, the CME, where the S&P 500 future and the Dow future are traded, have made no such decree.

When the proverbial sxxt hit the fan today, if you were long and wrong, you really had no escape, unless you had had a sell stop in behind any long position you had.
I remember in 1999 or 2000, one day the fed had a surprise rate cut. I happened to be short 7 Dow contracts at the time. Just as the unplanned and surprise cut hit the wires, I was luckily able to buy back 5 of those shorts, mostly out of dumb luck. The market rallied about 300 points in 30 seconds, with basically nothing trading in the pit for the first 150 points. I recall standing there, looking at a 6K dollar loss, and being upset, but also being grateful that I was short only 2 contracts for 300 pts. 7 contracts would have resulted in a 20K loss. As far as I was concerned, I dodged a 15K dollar bullet.
And I by no means was a large trader. I always had 2 to 4 contracts on, but some times would take an occasional 10 or 20 lot. The largest order I ever traded was a 50 lot, and I scratched 40 of it immediately.

There were about 15 traders in the Dow pit who traded 50’s and 100’s quite frequently. I believe 2 or 3 of those traders lost over 200K that day. One actually made close to 300K, because by the grace of God he was long when they did the surprise rate cut.

My point is this. On situations like what happened today, very often it is total luck as to whether or not you took a super loss or not. I characterize a super loss as a loss greater than 3 times your usual worse draw down. An amount that, in the end, it might take you a typical 6 to 24 week period to build up, assuming you were trading consistently profitably.

Another case in point was on 9/11/01. Several of my friends had tremendously profitable trades that day. One actually made his money on the long side. Again, fortuitously, he actually bought the first break after the first plane flew into the Towers. At that time, people didn’t realize what was happening. Trading continued, actually, until word came that the Pentagon had been hit. This individual had been long only a four lot, but as the announcement was made, he sold a twenty five lot, and then left the building short a 21 lot. Again, a profitable trade which turned on the flip of a coin.

In my last blog, I had cautioned about being too married to any position. I had been cautiously bullish for a long time, looking for one more higher pop. I had thought we would rally into the unemployment number on Friday, May 7th, and then most likely start a correction.
I never dreamed we’d have a 10 percent correction in one day. Or that that the correction would be fueled, by all accounts, by a rumored large institutional spec trader having a fat finger error with a straight up market order. Market orders go until they find a bid. Period. If it had been a market limit order, we would not be having this conversation. However, a straight market order goes until it finds a bid, even if that bid is almost limit down.

I wonder how many people sold the market in the hole today, on panic.
Again, if these people did not have buy stops above their sells, they could have been looking at a 700 point smack on the way back up!
Worse case scenario, is someone lost 700 pts on the way down, panicked and flipped and got short in the hole, and then lost another 600 pts or so as the market snapped back.

Which is why trading futures is a very very difficult game, where if you lose your discipline for a few moments, it can have drastically negative impact on your trading capital, not to mention your nervous system.

We rallied back and only finished down 350 pts on the day, after being down close to 1000. That has to be a victory for the bulls in any person’s book.

For the record, S&P cash rallied 553 points from its March 2010 low at 666 to the recent high at 1219. We broke to a low today at 1,065. That is a 154 point haircut. Divide 154 by the over all move of 553, and we have a 28 percent retracement of the 14 month rally. Unfortunately, it all happened in one trading day.

Dow Cash rallied from a low at 6,465 to our recent 14 month high at 11,258. That’s a 4,793 point rally. Let’s call it the Obama rally. 🙂
Today we had a low at 9869, a break from top to bottom of 1,389 points. Take this break and divide it by the overall rally, and we have a 28.9% haircut. Will we be calling it the Obama haircut? I seriously doubt it. But it would be kind of funny.

I am sure if there were a Republican in Office, we’d be talking about how the world was going to hell in a hand basket. 1) an off shore oil well disaster 2) market volatility which has to be blamed on someone/something 3) historically high unemployment… We’d be so much better off with a liberal Democrat in office. Oh, wait… Ummmm… never mind… (That was for all my leftie friends who cried for years that if only, if only…well ya got your wish, and guess what? It really doesn’t change things that much… The sun still rises, water still swirls clockwise on the way down the drain, and markets that go down scream out for a scapegoat named greed.

Ok, I am done with my soap box about all politicians and politics in general in this country. Politics is a sport covered like a football game. Both sides hate the other, both sides think the ref is in the other guys pocket, and both sides thank a higher power when ever their team scores more points, as if the higher power cared who actually won elections or Superbowls…..

Now you can win the bar bet this weekend, if someone asks how much of a “correction” we’ve had.

I still think we need to rally back up and get the 11,465 print. In case I am wrong, I will have sell stops in place every time I put on a long trade. Stops are the only way for a trader/speculator to protect himself against the vagaries of 1) market surprises, 2) environmental surprises and 3) the deadliest of hurdles, his/her own hubris.

Good Trading