In three trading days we moved from a range bound low volatility market to an environment of fear and chatter of market collapses. It is more difficult to predict price patterns when extreme volatility and fear are in play versus when the market is more subdued and market participants actions can be more easily anticipated. As traders we move into a “move to move” mentality as a powerful reversal is possible at any moment. We saw that both Monday and Tuesday.
After the market has a shockingly fast sell off experienced market participants look for signs of stabilization. Can higher levels hold? Will trading ranges begin to narrow? Will overnight futures settle down? As these things come to fruition more participants will return and put capital to work. I wanted to share my market related tweets from Tuesday night to Wednesday morning. Also, Wednesday morning I did something for the first time ever writing a quick blog post during market hours. I viewed the market at being at such a critical juncture I wanted to share my view of the market’s price action at that very moment.
When I tweeted this there were a few thoughts running through my head.
- the language I was seeing on Twitter was even more panicked than immediately following Monday’s crash
- I had just received an email from someone on our desk saying he was hearing “rumors” of more liquidations similar to Monday
- I was seeing charts being shared with lines being drawn from the past few years as potential downside targets
- The options market was still pricing in a move significantly below Monday’s low
To me these are the sorts of things you see at bottoms. In my view, it is much easier to predict bottoms than tops. I have not studied why this is the case but one factor may be the natural upward bias in equities markets and that at lower price levels larger amounts of capital are attracted. I created this video on “market predictions” earlier this Summer on why short term traders do this better than investment bank strategists (Hint: we don’t look out very far into the future).
After we bounced Tuesday night to flattish on the S&P futures I was hoping for a slightly positive open and then something close to a “re-test” of the overnight futures’ low, which was around SPY 185.50. Unfortunately, the bounce was too strong in the futures and SPY was trading above 192 in pre-market. I adjusted my thought process to prepare for a bottoming at a higher level perhaps near 188. The primary reason that I viewed it as extremely unlikely that I would be able to buy SPY at 186 or below is we were already on Day 3, and we would expect a reduction in intra-day volatility from Monday’s event.
Here is a link to the blog post I banged out in about 2 minutes late Wednesday morning. At the point I wrote the post I was short SPY as sellers were firmly in control, and we were still about 1 point away from my potential strong support area for that day.
The below chart I tweeted in the pre-market was included in the post as a road map for higher prices for later in the week.
After 12PM the SPY approached my by area and I tweeted this.
After seeing some more stability I put in a bid above 188.40 which got hit. Then I tweeted this.
As I mentioned above that after the market has a dramatic sell off experienced traders look for clues that the market can move to higher levels. Establishing “higher lows” in Tuesday and Wednesday were an important part of that process. The bounce midday Wednesday proceeded slowly.
Things began to accelerate later in the afternoon and I tweeted this.
The market finished the day above the 193 level, which I believed would likely lead to a test of 198 in the coming days. I trimmed or flattened most of my positions on Thursday as I was leaving for my annual trip to Nantucket on Friday. Time to head to the beach now. If you are in Nantucket ping me and we can meet up for a drink this week!
Steven Spencer is the co-founder of SMB Capital and SMB University which provides trading education in stocks, options, forex and futures. He has traded professionally for 19 years. His email address is: [email protected].
No relevant positions
