Miracle on Wall Street

Aug 16, 2007: 9:42 PM CST

The US Stock Market absolutely astonished most if not all traders today with a harrowing price plummet early in the day with normal corrections and continuations, but the stories will be written about today’s amazing price action likely will not focus on the fact that the Dow fell 300 points today, but the fact that the Dow Jones Industrial Average screamed upwards by 300 points to close virtually unchanged on what would have been an otherwise historic victory for the bears.

I had trouble selecting a singular headline to title this post on today’s action, and I could have well used any of the following:

Bears Make Their Stand… but So Do the Bulls

Bears Maul Bulls… then Bulls Stampede Bears

Unprecedented Price Action Right Before Your Eyes

New Life Breathed into Dying Stock Market

Top 300 Reasons Why it’s Great to be a Trader

Bears Take the Upper Hand… No Wait, Bulls take the Upper Hand

And so on. The point to take home after today’s action is the following: “Take NOTHING for granted in the market”


I’m reminded of a famous philosophical question and its response today:

“What Happens when an Unstoppable Force meets and Immovable Object?”

The answer is… “Definitions Change”.

So it is with the market. The Unstoppable Bears were met with the irresistible object of esoteric market behavior and price action today, and the events of the day stunned all who participated. I would bet few if any traders woke up this morning expecting the events to unfold as they did; I’m curious to know how many were positioned properly and how many were swept off guard.

Personally, I amassed large relative profits on the short side this morning and played the inevitable reaction upwards long and took profits both down and up. After taking a break for lunch, I began to put on a couple of significant swing trades and even a few position trades (with very small share sizes) short and was stopped out on each of my five longer term positions at small losses when the market stampeded in reverse (upwards) into the close.

As a conservative trader, my fault is close stops, but perhaps this one time saved me a lot in lost capitol by playing with tight “prove it or lose it” stops. Although I ended the day up, it was thanks to my over-leverage early in the morning (excessive risk because of overconfidence in the weakness of the market) and obsessively conservative placement of tight stops and small position sizes for swing trade plays.

Enough about how I fared trading today. Let’s look at some hard facts on the index charts:

dow-aug-16.jpg

Bulls managed to recapture lost territory in terms of sending price above the daily 200 period moving average. This major battle line is significant for many traders, especially larger funds and longer term oriented retail (independent) traders. Price sits now comfortably on the “line of demarcation” on the daily charts and has bounced solidly and convincingly off the support of the significant 50 period moving average on the weekly charts.

Many traders – myself included – are now switching their perspectives to honor these levels as support and expect a ‘bounce’ from here.

Technically speaking, the market is still in a downtrend by most traders’ definitions. We have not made a higher high or higher low, and the structure of the daily moving averages is still decidedly bearish.


Martin Pring would likely call today’s action a “Key Reversal Day” based on his teachings, and this is a significant distinction. Pring uses the term “Pinocchio Bars” to denote ‘key reversals’ where price begins at one point, travels significantly in one direction, then rallies back in the opposite direction to close relatively unchanged. Read a bit more on this topic for more information.

Key Reversal Days, or “Pinocchio Bars” tend to be very significant events that often signal “peak bottoms” (a term used by author and trader Bo Yoder). Such ‘one day reversal’ patterns tend to be so significant in scope that they overrule dominant technicals on the respective charting landscapes.

Let’s zero into the Dow’s 5 minute chart and see what took place:

dow-intraday-aug-16.jpg

I was able to detect the positive momentum divergence and play the resolution of the divergence upwards, but – again – my bias to the downside had me enter short when price started to roll over an play for a larger target than I should have been anticipating, resulting in smaller than expected profits. It was at this point that I attempted three swing trades and was stopped out tightly when price literally exploded upwards like a rocket, throwing many traders off balance. It was shorting the early morning reactions with greater leverage than saved the day (in terms of profits).

Folks, let me put this into perspective. The Dow Jones Industrial Average moved from (almost) 12,550 to 12,850 in one hour’s time. That is about as significant as it gets in terms of volatility and price movement in a compressed time-frame. You know that there was big money entering the market in a big way going “all in” into the close.

I cannot stress how great a sign this is (for the bulls) for the market. While I am not yet joining the camp that is singing “Happy Days are Here Again,” I must admit, I’m beginning to respect the bulls (buyers) courage more now than before.


Do yourself a favor – go to StockCharts.com or your favorite charting program and print off as many charts as you wish across many time frame’s of today’s action not only in the four major indexes, but in that of your favorite stocks. Today is likely to be a record day, or at least a milestone day for the history books, the likes of which we probably won’t see for some time. Study today’s action from an educational standpoint and save your charts for reference in the future. Trading is not supposed to be this volatile, but when it happens again, you’ll be a bit more prepared next time.

I have to reference fellow trader and psychologist Dr. Bruce Hong, author of the Trader Psychology Blogspot, with his post today entitled “Defense, Defense, Defense“:

“Remember to view this sell-off, as distressing as it may be, as a valuable learning opportunity. All the more so as there are so few of these learning opportunities. Rather than view this as a distressing event, let’s do a little cognitive reframing and define this as a chance to gain valuable experience; experience that we can use in the future.”

Dr. Hong also has some valuable insights regarding today’s action that I highly recommend.

Please don’t run away from trading just yet if today was a disaster for your intraday trading. I’ve been doing this for some time now and this is probably one of the the “weirdest” days in which I’ve participated. Hang around a little bit longer and build your skills through learning experiences such as these.

For all the rest, please trade safely in this highly uncertain environment.

4 Comments

4 Responses to “Miracle on Wall Street”

  1. Cherian Says:

    I’ve linked to this post on my blog, ttp://www.gaffairs.com/GlobalStock
    JC

  2. Frank Says:

    Now we know why it bounced – the big boys were told of the discount cut ahead of time. No other reason could explain it.

  3. Corey Rosenbloom Says:

    Thank you Cherian for your link and I appreciate your readership.

  4. Corey Rosenbloom Says:

    I agree 100% with you, Frank. Over dinner last night with associates, I shared that exact sentiment the night before the “Fed Cut” boost. I knew there was something up in the price action that wasn’t showing up in the newswires – not that I follow news with a fine-toothed comb. Such strength in the fact of a ‘meltdown’ (or at least very few technical or fundamental reasons to buy in mass with an “all in” mentality) can only mean that there is news the big boys have that the little boys do not.

    Circumstances like this almost prove the point entirely that pure price action and chart reading (price/volume/momentum) trump news-based trading or some other “popular story” trading. The footprints of the Big Money players are visible on the charts before the news occurs – if you know what to look for.

    Thank you for your comment.