Who’s Pulling the Strings in this Game?

Aug 3, 2007: 9:57 PM CST

I’ll be honest – I am SO relieved the weekend is here. This week has been the most surprising week of my trading career. I have seen many sharp increases in volatility in the market (not associated with a major economic report), but those events tend to be isolated and relatively rare.

This week, we saw the Dow Jones index swing 250 points down last Friday at the last hour (July 27); 250 points down in the last two hours Tuesday; 250 points up Wednesday in the last hour, 150+ points up Thursday in the last hour, and now 250 points in the last two hours Friday.

These volatile events have occurred within the last two hours… and in one case the last 15 minutes!  Despite the rampant end-of-day volatility (major price swings), the index really hasn’t moved directionally up or down from the trading range that is being carved out.

dow-aug3.png

The S&P 500 showed a similar trading/volatility pattern:

sp-aug3.png

Note that in the above examples, each ‘bar’ represents 30 minutes of trading time.  Each gray divider line represents the close/open of a day.  I am showing slightly beyond this week’s action above.

I wish to call your attention to the large ‘candles’ that occur at the end of each of the trading days – they look rather normal in this context, and are seeming unimportant in the daily or weekly chart views, but if you examine the 5-minute charts of each day, the pattern literally leaps out at you.

I have heard many reasons for the cause of the action – let’s just attribute it to skiddish, uncertain large firms or traders struggling for position in an uncertain economic climate.  Remember the stock market is an anticipatory vehicle, where all that can be known is discounted immediately, such that conditions that exist now were forecast in the past, and news items/data that occur now are discounted (price changes) to anticipate what these data mean many months into the future.

This is often the case where a market will plummet on good news or rise rapidly on bad news, or some seemingly nonsensical combination of the two.  What’s known and available to the public is already in the price as it stands now – there is generally little to no information edge for retail traders.

I recommend scanning the news and blog articles that will be written  this weekend regarding various perspectives on why we had the week we had in the market.  It was said that last week was the worst week for the market in five years, and that this week was the most volatile for the market in many years.

For those of you who traded actively through this week and came out either unscathed or slightly wounded, my hat goes off to you.  I took some minor short-term hits both ways this week!  For those of you who took some major his this week, don’t give up – chalk it up to knowledge and experience.  It is my guess that we won’t have such a wild week in a long time – if you survived, know that the water is unlikely to be so choppy for some time.

Wear your wounds proudly and document as much data as you can from your experience.  Don’t get complacent and be aware that the market can always change at a heartbeat’s notice.  Even experienced traders took some hits and were surprised greatly this week – that’s what makes this ‘game’ fun!

It would honestly be boring if everything was the same day in and day out.  Isn’t that part of what attracted you to trading in the first place?  The thrill of the chase; the anxious heartbeat of racing prices; fortunes being won and lost in a moment’s notice; greed, euphoria, and fear raising their spectres all through the action; traders loving and hating the market simultaneously.

Stay alert, learn from this week’s action, clean the wounds this week no doubt inflicted, and live to trade again (thanks to risk control measures!).

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