Monday, August 8, 2011

SPY - this is a crash?

Here's a quick observation of the SPY today.  One comment I've read on my Twitter stream is that on the daily charts, it sure does look like a crash, but on the intraday charts, the selling has been quite orderly.

Since 95+% of my focus is on the intraday charts, I've also noticed how relatively uneventful the intraday chart patterns for the SPY and other indices have been over the past few days.  Sure, it's a bit more volatile than usual and it doesn't seem out of the ordinary...until I see the % loss for the day.

Today, the SPY moved more like a typical stock that's in-play (news driven), so maybe that's why it didn't look that unusual to me.  And something that Bella mentioned in his book, "One Good Trade", is that when you get significant volume in a stock, you neutralize much of the noise from the algos.  I've found that it then usually results in a more natural trading action, which means the Fibonacci levels tend to work cleaner.

Here's an example of the SPY today, and how the Fibonacci levels worked well to help predict the low of the day (and see how it reacts at the other Fib levels).  This calculation is similar to calculating a "measured move."  In this case, the opening range is calculated, and then that range is simply subtracted from the opening range low.
  • The opening range over the first major swing (70 min) = 3.11
         118.38 high - 115.27 low = 3.11
  • Forecast of "measured move" = 112.16
         Opening range low 115.27 - opening range 3.11 = 112.16
  • Today's actual low = 112.02 
SPY - 5min 2011-08-08
Take into account the whole number effect of 112 acting as a magnet, and you can see that the forecast of 112.16 isn't that bad -- you can use a ballpark figure of 112-112.25 as a range to monitor for a bounce.  I find these Fib levels more useful (and safer) as a target for exiting short positions, although for those who like to try and catch falling knives can also feel free...

So much for a crash, at least on an intraday basis.  This pattern was similar to just another day at the office for a typical stock that's in-play.  But then again, this is the SPY, a very heavy ocean liner of a stock that usually moves with slow and heavy steps.

Makes you think, if it moved so orderly but yet so much on heavy volume, how will the markets look if it becomes disorderly on heavy volume?  Take a look at the monthly chart, going back to 2002. 
SPY monthly - 2011-08-08
Does it look like we're in a crash? Possibly, although it just looks like a bigger than usual pullback. But if we are crashing, this is just the beginning.

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