Here's a general price action question. Compare two major declines. They both fall the same percentage but one occurs in a single day (flash crash), the other occurs over a longer time. In both cases there is no known fundamental cause of long-term significance. Can anything be inferred by the difference in speed? if one is long, should one be slower to sell in the case of the flash crash because it is more likely to retrace?
"Flash crash" versus gradual decline
- Thread starter Steve Ladd
- Start date
Essentially, it's like comparing the bear market of 1974 with the October crash of 1987...Both created extensive damage to investors, but the speed of 87 (with many people unable to even contact their brokers) made it a panic...
Price goes down because the bearish traders are stronger and they are willing to sell at lower then bid price - demand to sell is high.
1-day strong decline would suggest that on that day there were a lot of short-term Bears willing to sell at lower price and their pressure was strong. It is also would mean that the Bulls were weaker than usual and they were not able to stop and or halt the bearish pressure. Now, here it would be recommend checking volume. Was 1-day decline on higher than average volume or there were no volume surges? If there ere no volume surge that would mean the Bulls were weak and scared and drop in price did not attract them and they were not jumping in to fight with the Bears - most likely you will see further decline. If there was a volume surge, that would mean that this strong decline attracted Bulls and they started to buy on their opinion "at low" - if this volume surge was big enough (a lot of Bulls were jumping in) we may see a reversal as the Bears could be exhausted (their selling demand could be satisfied by coming Bulls)
Multiday decline usually does not generate increase in volume (volume surges). This would point that the pressure of the Bears is strong and steady. These are not short-term Bears and it is not easy to beat them. Even you see a bounce up, you may expect a reversal back down. As a rule, multi-day decline (correction) ends up with 1-2 day of a strong decline on high volume which would indicate Bulls jumping in to buy at low (by their opinion).
All this mechanics is explained good at
http://www.marketvolume.com/advance_decline/overbought_oversold.asp
Watch volume and price together, then it would be easier to explain price action.
Does speed tells something about retracement?
No ... At least not A Priori nor from my experience.
Quick move would be more prone to retrace (Weak Ladder).
But it's not the case. You better have to check it yourself or backtest.
Maybe it's security, time or whatever else dependent. Otherwise it's spurious.
Note, you don't know you are in the "slow" scenario until it is well established.
For me, both are traded according to my system, and no differently than usual.
I agree with this....albeit I don't know his "system".
This time around, it could be an agonizing move down....where all countertrend rallies are sold.
It's a horrible environment....and only the most sophisticated traders could thrive via options strategies.
That's a good link. So a volume spike says that a reversal or at least a consolidation is likely. And volume spikes are more associated with rapid price movements. The volume spike is like steam being let off.
It's more complicated than simply the chart movement. You have to look at WHY the move down occurred. Is it something surprising and potentially misunderstood (Brexit) or something more sustained that indicates shifting of equity portfolios by large players?
The other thing to remember is the effect of the retail 401K holder today. Their impact is always the day after as they must call or make a move online, but it isn't effective until the end of the day and the transaction generally occurs next day. When we have bad news, a certain amount of the public will react and shift their 401K allocation accordingly. I think this is exacerbating moves in both directions the last few years - especially on multi-day hard down moves and retailers puke up their index allocations. The amount of money being held in 401K accounts invested in the market is no longer an insignificant sum.
The other thing to remember is the effect of the retail 401K holder today. Their impact is always the day after as they must call or make a move online, but it isn't effective until the end of the day and the transaction generally occurs next day. When we have bad news, a certain amount of the public will react and shift their 401K allocation accordingly. I think this is exacerbating moves in both directions the last few years - especially on multi-day hard down moves and retailers puke up their index allocations. The amount of money being held in 401K accounts invested in the market is no longer an insignificant sum.
In the past floor traders worked on hour and daily charts, now HFTs work in milliseconds, both would have had the same end result, only the elapsed time is different in completing the move. It's really that simple. The problem is that most people cannot react that quickly with confidence to keep up, and the infrastucture of the markets are not designed for those levels, so they invalidate quotes to cover themselves. If you look at the technicals of a flash move you can see why they happened, even the Brexit you could see the collapse before it happened, even today virtually no-one has figured it out!
To take an extreme example, in the flash crash of May 6, 2010, prices rebounded to more-or-less previous levels within minutes. In such a case a long investor might be better off with no stop loss order in place.