I’ve never been so happy a weekend has arrived.  Before that weekend starts, let’s take a look at the 1,000 point intraday swing in the Dow and other insights from the intraday trading for October 10, 2008.

$INDU 5-minute chart:

Folks, a 1,019 point Dow intraday range is nothing to sneeze at – it is absolutely remarkable and worth further attention.

The global markets fell roughly 10% each, and the US Equity Futures were off around 5% with the equity markets opening roughly in line with the futures, selling off, then sharply rallying… only to drift slowly lower all day… until the final hour where miracles happened (or curses for the short-sellers) into the close.

Are technicals valid in this environment?  They provide and identify structure and probabilities and allow snap-analysis of risk-management points as well as possible price targets.  It’s just that this environment is driven far more by emotion and news than anything, so while technicals can be helpful, they are not, and will never be absolute or infallible.

Nevertheless, price did respect the falling 20 period EMA and made a series of ‘clean’ lower lows and lower highs all day until the positive momentum divergence ‘caught up’ with price and then the index violated the 50 period EMA, shifting to a bullish breakout from consolidation and resistance.  That sharp 8-bar rally up underscores why it’s difficult for both longs AND shorts – if you were short and didn’t take a stop-loss, you could have endured a sudden 800 Dow Point rally against you, potentially destroying a small (overleveraged) account.

Price stopped at 8900 – the 200 period SMA before falling back into the close – how wonderful (for the bulls) would it have been to have achieved a positive close this Friday?  It wasn’t meant to be (in the Dow).

With 8 consecutive down-days in the Dow, where does that leave us on the Daily chart?

$INDU Daily Chart:

Price made a new low well beyond where most people expected – it was absolutely brutal.  People tried to catch bottoms along the way but it also wasn’t meant to be.

Price has now formed a ‘doji’ which could be a reversal signal but you don’t need to bet the farm on anything in this environment – stay small and heavily risk-controlled.

Print and annotate multiple stock charts and analyze them this weekend – it will be a helpful exercise that will add some perspective, as well as enhance your pattern recognition.  Plus, this kind of persistent down-moves aren’t likely to occur often (so we hope) so it could be interesting to observe them while the exist.

I thought it might be helpful to look back since 2000 to show the two previous times the Dow Jones Index was down seven consecutive days in a row.  The next two charts show the before, during, and aftermath of these instances for you to see for yourself.

The first time it happened since 2000 was just before and after the September 11th terrorist attacks in the USA.  The Dow had declined three days prior to the attack, and the market was closed for a week after the attack.  Here is what the chart looked like then:

(Note:  I programmed a strategy to identify these times and as an exit, I programmed a 16 day time exit – you may ignore the green bar – I don’t discuss it.  16 was an arbitrary time-based exit I chose).

The market actually fell for 8 days in a row before recovering sharply back to the 10,000 level by the end of the year.  Price ultimately went lower, bottoming at 7,200 almost exactly a year later in 2002.

If you are astute, you notice the red highlighted price bar “8,579.”  That’s TradeStation’s way of saying “This is what the currently symbol you’re looking at closed at most recently-” in other words, the Dow Jones is currently very near the price levels achieved on the 9/11/01 attacks – let that sink in for a moment.

Ultimately, price peaked at 10,600 in March, 2002 before heading lower to bottom in October.

The next time it happened was in mid-2002 in the throes of the Bear Market a few months prior to the actual bottom.

If you look closely, you see my strategy (buy at the next open after a seven-day consecutive decline occurred) fired actually in the middle of the consecutive move.  There was a white (up-day) candle in the middle, and were it NOT for that solitary up-day, price would have closed for 12 days in a row – remarkable.  I label the down days, excluding the single up day.

Price ultimately “snapped back” but not before plunging 1,000 more Dow points before a reversal.  Even then, the ’snap-back’ reversal only took price to 9,000 before plunging down to 7,200, marking the Bear Market bottom (price ultimately retested this low in March, 2003 before beginning the Bull Market that ended just a year ago – October 2007).

So now that the Dow Jones index has declined 7 days in a row, which will it be? A snap-back rally or a continuation?  We can go back further to test, but since 2000, a seven-day consecutive price decline has happened only two times, and for both times, a divergently different outcome resulted.

Be safe, guard your capital, and don’t expect a rally “simply because it is due.”  It may happen; it may not.  Either way, price is likely to move violently, quickly, and (perhaps) erratically.  If you’re on the wrong side, you will lose capital quickly.  It might be better to wait until the waters calm down a bit before stepping back in.

NOTE:  If you are a TradeStation user, here is the simple code I programmed to run this study.  You can use it to test different indexes over longer time periods.  Simply add more days or subtract days (in the close[7] lines) for more analysis, including possible exit/stop-loss strategies:

if close<close[1] and
close[1]<close[2] and
close[2]<close[3] and
close[3]<close[4] and
close[4]<close[5] and
close[5]<close[6] and
close[6]<close[7] then

buy next bar at open;

Just when you thought it was safe to enter the market.  Also, “what a difference a year makes.”  Exactly one year ago, the S&P 500 and Dow Jones made all-time highs… one year later, we’re making fresh and significant five year lows.  Let’s look at the S&P and the XLF Financial Sector on weekly charts.

S&P 500 Weekly Chart (compressed):

To say the ferociousness of the recent price swing down was unexpected (in its magnitude) is perhaps an understatement.  Many of us – myself included – did have price targets beneath S&P Index value 1,000 (some even down to the 2002 lows near 750) but I don’t know of anyone who had the targets being achieved this quickly – it was stunning and remarkable.

Notice how the market was making lower swing lows and lower swing highs in an orderly fashion – that is the ‘rules of the game’ and normal conditions.  The trajectory (trend) is clearly down but it is peppered with stable, salient retracements (usually to key Fibonacci levels such as 50% of the prior decline).  In this current swing (which – as of this writing – is not over yet), there wasn’t a pause or breath – it fell like a rock, blinding many fundamental, technical, and quantitative analysts.  “This isn’t normal.”

But it is what it is – Mark Douglas said it best:  “Anything can happen [in the market]” and “Every moment in the market is unique.”  I thought of his quotes immediately when the government banned short-selling on Financial stocks – did anyone see that coming… or even as a conceivable possibility?  Even if you did, could you have foreseen the ramifications of that decision?

So we’re in a new world with perhaps new rules – what worked in the past doesn’t seem to be working (in terms of long-term investing or short-term/position trading when it comes to ‘buying what’s overextended’ for a ‘reversion to the mean’ style trade).  It is what it is.

Anyway, let’s look at today’s 7% index decline as distributed across the AMEX select Sector SPDRs.

The intraday Sector Performance:

The Energy and Financial sector were hit hardest, with – surprisingly – the Technology sector holding its own (Apple – AAPL – though it closed slightly lower, did well for the day and could be starting a counter-retracement up along with RIMM – but that’s another story).

Let’s zero-in on the Financial Sector.

XLF Financial Sector:

The major culprit behind the recent ‘crisis’ stems from past practices with Financial related companies.  The financial sector – and investors in it unfortunately – have suffered dearly for those mistakes.  Banks are in serious trouble and are seizing up – credit is no longer lubricating the US Economy as freely as it had in the past – banks are afraid to lend and no one’s exactly sure when the next shoe will drop or how much ‘toxic debt’ is still on the books.

So what is the expected play now?

You’ve heard it 100 times now – the market is so overextended that a rally is due.  But the next day brings more selling, so the sentiment grows more urgent:  “Well, we’re certainly due for one now.”

My response?  Absolutely, and it’s probably going to be a quick rally – but it seems like the government is doing everything it can to start that rally (cutting rates, giving speeches, passing the Bail-out bill, etc).

But it hasn’t happened.

Let the professionals play in this market.  Let them catch the falling knives – somewhere (perhaps here), price will hit valuations that fundamental (and even technical) traders will find unbelievably attractive and they will begin buying – perhaps aggressively.  But as long as fear and panic rules the day, it’s uncertain when that time will come.

Whatever you choose to do, your #1 goal should be capital preservation – be it taking smaller positions, trading more selectively (not just jumping at anything that moves), going away from stocks temporarily and only trading ETFs (perhaps even Index ETFs), or even just sitting in cash while avoiding the market altogether – it’s your choice.

But don’t think you’re going to make a killing when everyone is getting killed.

Adam Hewison of Market Club released a video analysis of Gold prices today that I wanted to share with you, as well as provide you with my own chart of daily Gold prices.

Adam discusses how to use the Market Club software to identify larger trend then drill down to the smaller time frame for trade entry – full details are available for MC Members (click to join).

The Video is entitled “Is Gold Ready to Skyrocket?” and Adam assess the past and current trends, as well as asks “Why hasn’t gold surged as many people expected – is it ready?”

Here is a quote from part of the text from Hewison:

“I have just finished a new video on gold that I would like you to see. This new video deals with some of the strange events that we’ve been going through the past two or three weeks, or in some cases several months.

I know most of the gold bugs have been disappointed that their favorite yellow metal hasn’t skyrocketed to new highs. Some people said that we’d hit two to three thousand dollars an ounce when gold topped the one thousand mark a few months ago. I’m not sure that we will see levels like that, but the reality is, we could be seeing more interest come into this market which could push it higher.

In this short five minute video, you will get to see how well our “Trade Triangle” technology has done in the gold market. I will also show you when I think gold should hit its peak.

This is an educational video that is meant to inform you on the dynamics of the gold market and how it can help you improve your trading and timing in the future.”

And here is an annotated chart from Corey on Gold’s daily price:

We see the $920 per ounce level creating short-term resistance (actually it’s failed three times at this level and is lower as of this writing – trading around $892/ounce) which may serve as a formidable level in the short-term – a break above this level could propel prices higher as Hewison suggests, particularly because the momentum oscillator is clearly uptrending and showing a stronger momentum positioning.

A positive divergence preceded the sharp rally from $740 to $920, though we never know how far price will go just from momentum divergences alone – they only warn of increasing or decreasing momentum/acceleration of prices.

It’s hard to draw on the chart because it’s evident just in the price itself, but there’s significant congestion about the $860 – $940 range:  notice the numerous swings (and price/bar overlap) that occurred in that price area.  In Market Profile terms, this could be deemed a “Value Area” or “Balance Area” where fair value has been established multiple times.  Departures from value brought price right back to this area, so it will take a major change to drive prices to a new higher (or lower) value area… in other words, a trend-break move could soon occur as the perception of value shifts.

The weekly chart is in a confirmed downtrend and appears bearish, but note that a break to new highs around $920-$930 on the daily chart would officially confirm the birth of a new uptrend (having made a higher high, higher low, and then taking out the recent swing high).

It’s certainly worth watching (or trading) gold closer, but beware the rampant volatility (as in record one-day price moves) that has taken place in this uncertain economic environment – often gold benefits from uncertainty.

With all the rampant volatility of the last few days, it’s easly to lose focus on the larger structure.  Tuesday, the S&P 500 tested its 200 month moving average – Wednesday, it broke it.  Let’s view the monthly S&P 500 and Dow Jones Index charts.

S&P 500 Monthly:

After price violated the 50 month EMA to the downside, the eventual initial target was indeed the rising 200 month SMA – I’m just shocked at how quickly it happened.  We’ve lost 300 S&P points in just over one month – a remarkable and stunning development.  We’ve also blown through the well-known large-scale Fibonacci retracements as well – almost as if they weren’t there.

Price is now back to levels not seen since 2003, and there’s the great potential that if you put money to work at virtually any time since 1998, you are currently underwater (have lost money).  I cannot underscore how staggering that sentiment is – to be fully invested for 10 years and have little to nothing to show for it.

Also, the momentum oscillator has made a multi-year low.

Dow Jones 30 Monthly:

The picture is similar here, with the exception that the Dow Jones outperformed the S&P (and NASDAQ) in terms of exceeding the 2000 bear market highs (in this case, by around 3,000 index points).  Price has still fallen precipitously, has made a significant new momentum low, and is also likely headed to test its rising 200 month SMA.

The prevailing thought among traders and many professionals is that the market is ‘overdue’ for a technical (corrective) rally to work off some of these oversold conditions and ‘internal’ indicators (as well as near record high VIX readings). While we will get a rally ‘eventually,’ Dr. Steenbarger of TraderFeed recently addressed this topic in his must-read post “The Financial Panic of 2008:”

“Normal historical indicators of market bottoms are broken. We cannot count on market rallies simply because we are oversold, even though those oversold levels may have represented past opportunity. As long as money flows are negative and traders are hitting bids in size, weak markets will get weaker;”

I must confess it has surprised me deeply that the Rescue Bill in Congress failed to lift markets higher, and this morning’s surprise 50 bps rate cut (as of noon) is also failing to lift markets higher.  I find myself with an irresistible urge to put on a long (buy) swing position (I’m primarily an intraday index futures trader), but every morning I want to try that, the market has opened lower or sold off on the day, preventing my greed from taking over (and violating my core trading strategies).

Steenbarger is right:  “We cannot count on rallies simply because the market is [grossly] oversold.”

It’s rough – on both sides.  Shorts aren’t loving this and neither are longs.  The market is making stunning swings in both directions, often without provocation.  Also, what we feel like justifiable provocation often turns out to have the opposite effect than was expected – even if expected by a large consensus.

These are very, very difficult trading conditions and you shouldn’t beat yourself up if you feel you need to stand aside, especially if you are a swing or position trader until conditions become more favorable.

Stay safe and keep capital preservation as your #1 goal.