Bears Take a Large Swipe

Oct 11, 2007: 10:25 PM CST

Was today’s action surprising to anyone? To everyone? I was surprised just like everyone else.

Luckily, I enter and exit the majority of my intraday trades in the first three hours of market action, but I was stunned to see the velocity and ferociousness with which the sellers drove prices down in the indexes and in many stocks within the last hours of today’s market action.

Many traders including myself mentioned overextended conditions, but I doubt many traders expected the correction (which may yet continue still) to occur so rapidly at the END of the day instead of the beginning or even overnight.

Do you remember the ‘overextended’ charts I’ve been showing? They’re not so overextended any longer.

Let’s take a peek at some damage done on the daily charts:

Volume finally rose… too bad it was strongly on the downside.

Let’s take a peek at the Nasdaq damage intraday:

  • A prolonged momentum divergence was developing all day… but this was a news related decline, not a ‘technical’ one
  • Price carved out a “Measured Move” in the two downthrusts
  • Price made a new momentum low after 2:00pm, and the reaction set up the “Impulse Sell” trade with a potential measured move target.
  • Momentum (impulse) was so strong that you could have almost ‘threw a dart’ and gone short, not waiting for proper trade location/entry

Now, let’s look at some of our formerly overextended stocks:

A lot of traders, especially newer traders, were caught blindsided in the waterfall decline. Price fell $17 in approximately 30 minutes. If you didn’t use hard stops, you had to rely on your reactions alone.

Price actually was terminated at the daily 20 period simple moving average (light dotted line). It looks like the price magically stopped on the intraday chart, but price action was truncated at a daily support zone.

Google (GOOG):

Google surprised traders with a $30 decline within an hour. A measured move occurred following a new momentum low.

And… what’s worse than a $30 decline?

Answer: A $60 decline… in two hours.

This is Baidu.com (BIDU), a Chinese Internet darling stock, affectionately known as the Google of China. How true this was from a technical standpoint.

The daily chart shows the terror:

Actually, like Apple, the price decline was rejected at the rising 20 period moving average. Look at the volume for today’s action.

Baidu warned of a possible correction through a clear momentum (swing) divergence. Price returned to the area where the divergence was first formed.

We could look endlessly at today’s action through various charts and timeframes.

I highly recommend that you take ‘stock’ of today’s action and print off or store some of the more interesting charts. Annotate them and refer to them in the future.

Anytime there is an anomaly, or a ‘shocking’ action in the market, it helps you put it into perspective by viewing it through various stocks and timeframes.

Be careful, be safe, and learn from strange occurrences.

2 Comments

2 Responses to “Bears Take a Large Swipe”

  1. Aaron Says:

    The volume from 1:45 on, during the quick selloff was the most concerning part of the reversal yesterday. Look at the volume on the QQQQ shares trust, it was higher than anyday since the August market breakdown. Certainly something to keep an eye on.

  2. Corey Rosenbloom Says:

    Aaron,

    Excellent observation. I had not made the connection to the surge in volume. There was a 15 minute period where volume hit 30 million shares.

    The action of today was a slight rebuttal of Thursday’s move. I’m getting nauseated with all this up and down day to day action.

    I’ll keep a close watch on this next week. Thanks!