Flash Crash Part 2 Coming the Next 3 trading days into July 6 2010

Everything I am looking at right now suggests to me we are about to ‘engage’ on flash crash part II during the next 3 trading days.  I am talking a one day 7 to 10% down day during one of the next 3 trading days.

The only confusion I have left is whether or not we get a huge ONE DAY bounce before hand perhaps on the order of 2 to 2.5 % with a close near the highs.  If we do get a one day bounce then it really ought to happen tomorrow.  We are in a spot right now where it is ideal for a big one day bounce to occur.  I suppose it could also happen on Friday on a less than worse jobs report, but that seems like an unlikely scenario going into a 3 day long weekend.

On the other hand I am seeing signatures that look very similar to the stance the market was in right before the May 6, 2010 flash crash.

Not too many others seem to be calling for a crash.  Other than the Bill Mclaren interview I posted the other day which was on CNBC, I do not see anyone else on CNBC talking about a crash, nor do I see it on popular message boards.  The traders who were previously looking for a crash have pulled in their horns or are looking to go long.  Perhaps it is because we are in JULY and not October.  A crash just cannot happen during a slow summer month of July right ? Wrong.  It is probably the worst time for one to happen too because everyone is starting to pack their bags for the 3 day holiday weekend and looking forward to fireworks and grilled hot dogs.

The iShares Lehman 20+ Year Treas.Bond (ETF) symbol TLT is giving me a big clue right now that we are in a very similar stance to that day right before May, 6, 2010.  The TLT closed slightly higher again today on robust volume again and the 14 day RSI (relative strength index) closed right under the 70 level.  In other words the TLT is just about to enter the oft referenced ‘power zone’ during which one tends to see extremely high volatility.  Again, the last time the TLT did this we saw the May 6, 2010 flash crash initiation.

tlt20100630

But the issue still remains, is this decline going to be a garden variety typical down day that ends up rallying back up by end of day? OR will the day end HARD DOWN right at the bottom of the range into the close just like in 1987.  This is the key observation I am hoping will reveal whether or not we do an 87 style repeat or a regular ‘Bernanke style’ up and down volatility style correction.

If we decline in similar magnitude to the May 6, 2010 drop from current levels then it would put us slightly below 950 on the sp500 which is smack in the center of this strong supportive range I pointed out in yesterday’s post.

Anyway I could go on and on and theorize about the next few trading days forever.  But the bottom line to me at this point is that there is still plenty of room to go down even if we do bounce up very hard tomorrow.

The degree of bearishness that is appropriate probably depends on how the candlestick looks this Friday going into the long weekend.  If for some reason that candlestick closes right at 950 and is a very large long black candlestick, it might suggest that Tuesday will see some massive downside follow through.

The fact is that we have not seen a market move that REALLY strikes true fear into both the public, the government and market participants world wide.  A move down from here that is slow and orderly and recovers most of its loss by the end of day close is not the type of move that would strike true fear. 

A relentless series of hard down closes that make the market go down and stay down would do the job however.  By the way I don’t wish to see a break in the market in this way because I know it would hurt a lot of good hard working people and the buy and hold crowd.  A series of huge down moves that settle the market much lower from here might really start to change people’s attitudes for good about the stock market.

Don’t forget this one important fact.  The 1987 crash STARTED from an oversold RSI reading of 30.  Then the RSI entered the negative power zone below 30 for 3 trading days that marked the epicenter of that crash.

Today the RSI closed at 31.8 on the sp500 and puts us within inches of the negative power zone.

Exit Point?

What would be a simple way to determine an ideal exit point assuming the worst happens and we drop like a rock during the next week?  I would say that an RSI reading between 10 and 22 on the sp500 would mark an ideal exit point for all short related positions.  Whether or not we are able to get to such extreme low RSI readings is unknown.  It is going to have to be a day to day type analysis.  The hard part is that the difference between and RSI reading of 10 and 20 can equate to a difference between an extra 10% down on the sp500 or not.

Analyzing the day to day swings is highly speculative, but I have a very firm conviction at this point that the next week (and maybe the week thereafter as well) is going to be down, perhaps more than I can even imagine at this point.  Again the target is 950.  But where we are on Friday and how the close looks on Friday should reveal a lot more about the setup for next week.

Posted in Index Trading, Market Timing, SP500
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6 comments on “Flash Crash Part 2 Coming the Next 3 trading days into July 6 2010
  1. Geoff says:

    Your observation: “Today the RSI closed at 31.8 on the sp500 and puts us within inches of the negative power zone.” fits exactly to what I have also observed. That is that the market’s or a stock’s move is very frequently the most dramatically down when the Slow Stoc is around 30. That is very counter-intuitive since one would think that the biggest drop would occur from Slow Stoc 80 to 30, but I have found, from experience, that that is not the case.

    I definitely buy into your observation and while it still might not happen, the probability is good that it will

    Thanks again for your analysis. It is thoughtful, considered and appreciated. Thanks for posting!

  2. rippy41 says:

    are you looking at the RSI on the daily or weekly or hourly time frame?

    great work, thanks!

  3. Tom Tom says:

    Daily time frame. Assuming the ultra bearish scenario engages then the weekly RSI could be used to find the ultimate bottom which would put weekly RSI at 30 for the final low.

  4. Tom Tom says:

    Welcome. Glad to have you aboard.

  5. Gooner70 says:

    Tom

    Are you familiar with the ‘Puetz Crash Window’, today is the first time I have heard about it, t is an astrological concept. Apparently we are within a ‘Puetz Crash Window’ at the moment.

  6. Tom Tom says:

    Gooner,
    Yes I have heard of Puetz crash window but I cannot say I know much about it. Problem is I remember people referencing him many times in the past maybe too often than I care to remember. Hopefully it does not jinx the near term price moves..

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