A Crashing Market In 2011

[Brendan Egan]

Update 8/4/11: Since posting this article yesterday morning our analysis overall appears to be correct as we saw a tremendous down day today, with the major indices in the US stock market down some 5%, the Dow Jones down 512 points.

Since 1896, there have been 43 times the Dow Jones has been down for 8 days in a row, which is the current situation we are facing. If the Dow Jones should close down today (and as we speak it is down some 110 points) it will be the 9th day in a row, which hasn't happened since the 1970's.

Technically speaking we are below a major area of support that I didn't think we would break through, however we have one other strong area of support below us still that we need to keep an eye on. We are also watching extremely high volume pour into the markets and once again and we see the VIX (volatility index) soaring as well. We haven't had a losing streak point wise this bad since the market crash of 2008.

Fundamentally speaking, the debt issues with the US have certainly put a new spin on the markets, and the fact that a deal was reached isn't helping much because it's a deal that no one is satisfied with--sort of a last minute deal to just get things pushed off for another year. Likewise there have been some terrible economic numbers--from consumer spending to manufacturing data to the grim looking jobs report this Friday. The housing market is looking pretty grim and foreclosures are on the rise. It's pretty difficult to find positive economic data right now.

While I personally feel the markets have been ahead of their selves for some time now, it appears that Wall Street is finally starting to agree with that after the pullback we have seen. Historically speaking, however, things actually don't look as bearish as you might think. The last 10 times the Dow was down 8 days in a row, 8 of those times it increased substantially over the following months and only 2 of those times did it continue to decline over the following months. This is a statistic that many trading networks are throwing around, but quite honestly I don't put too much weight on it because things are extremely different during this recession than any other recession or market crash--this is a global recession affecting not only the markets but also homes, banks, the government, and virtually every corner of the economy.

With that being said, here's a few pointers that I always offer when we see the market moving so swiftly:

1. Make sure you know what you're doing. Trading is hard enough already, but if you're new and trying to make a killing in these markets there's a good chance you're going to get run over. These types of movements are hard for traders with decades of experience to trade, so don't think that you can just jump in and swing for the fences.
2. Keep your stop loss tight. This is good practice always, but make sure you are keeping things tight and following your stop loss. Things are looking pretty volatile and we could see swings to the upside as well, so even if you have a short position right now make sure you have that stop in place.
3. Make sure you're using a method that works during these crazy market swings. There's a lot of trading methods out there that don't work when the market is doing crazy things and when it's extremely volatile, so make sure your method works during times like these. The methods taught in the Price Action Course do work during times of increased volatility.
4. Don't assume that 8 down days in a row means tomorrow will be a down day. There's actually a greater and greater chance that tomorrow will be an up day as we see more and more down days occur in a row. Markets never move 1 direction for too long.
5. Keep an eye on the news. I'm by far a news based trader but during times like these big news stories like the US Debt Crisis and Unemployment numbers can run the markets. When economic reports are way out of line with expectations they can take over the market and cause technicals to temporarily take a backseat.

Overall some economists are calling for a double dip recession right now. It's anyone's guess, but I personally don't think we will see things as bad as 2008. I do think we are at a critical point in time where growth is becoming stagnant and the economy overall is slowing (higher taxes, higher costs, higher energy prices, higher regulation will cause this to happen) however I don't believe we will see the types of economic numbers or market numbers that we saw in 2008. A pullback is certainly due, and the road to recovery is never a smooth one, so I think this type of bumpy road we are on right now is somewhat normal for a recovery from a deep recession.

If your opinions or outlook differs we would love to hear from you--feel free to register, log in, and reply below to share your viewpoints on the market.

[fxpro2]

Great post and great ouline. I agree with most of the points and am just approaching my trading very carefully. There's a lot of money to be lost when the markets are moving this swiftly.

[Brendan Egan]

Thanks FXPro. I guess I should have hesitated before mentioning that today would be a down day--who knew we would swing from 150 points down to end the day up 29 points-- but then again that is consistent with the other points in this post-- the market sure is EXTREMELY volatile these days.

Good luck trading all!