There are a lot of excellent charts and commentary out there, but I thought I would share a couple of thoughts about yesterday’s action and the market’s prospects for today and beyond.
So…in no particular order:
- The possibility of a fat finger order entry error cannot be dismissed, but even if there were one or more unintentional large trades, this does not nullify the concerns about sovereign debt contagion, breaking of technical support, recent excessive bullish sentiment, etc.
- The bottom line is that stocks still have serious problems of a fundamental and technical nature.
- Yesterday’s correction would not have been so steep if stocks had not rallied so sharply, with only brief interruptions, for the past 14 months.
- The VIX spiked over 40 yesterday. While there is no magic number that signals a VIX top, the volatility index is up more than 110% in the last 18 trading days. Apart from September-October 2008, this has never happened in the 17 years since the VIX was launched.
- Whether this morning opens up or down, I would not give much credence to any big moves at the open today. If I trade at all in the first half hour, I expect I will be fading any big moves.
- Looking next week and beyond, I would not be surprised to see stocks enter into a trading range, with the late April highs as a top and yesterday’s lows as a bottom.
- Traders should keep in mind that watching and waiting for more market clarity is an appropriate strategy at times. Patience and discipline almost always trump trying to make something happen.
- In times of increased uncertainty, I try to focus on preserving capital, evaluating the fundamental causes and likely duration of high uncertainty, targeting only high reward-risk opportunities, scaling in to new positions, and adhering to stringent stop loss and position management guidelines.
- Finally, a personal motto is, “In volatility, there is opportunity!”
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