Thursday was a long, deep drink of cool water for bears after living in a technical desert for many months. It was the third drop of 300 or more points by the $INDU during 2014 (with the first two times occurring in January 2014). I was impressed with this technical event arriving on the last day of the month. Volatility showed up boldly and US equities just declined (and then declined more). Dip buyers were stunted for the 1st time in months.
- Thursday Shock Event (across the equity markets) on nearly all charts
- Selling came on much higher volume (see charts below)
- Market Internals have changed (see charts below)
- Bearish engulfing candles now probable on the weekly index charts
- Many key daily trend lines broken (including the $INDU)
- Volatility finally launches as VIX climbs 23% (watching for follow through)
- Technically, the overall trend has not changed (yet)
- A 2nd shock may arrive as early as Friday morning.
A shock event (up or down) is a strong directional move in the opposite direction. It comes on larger than normal volume (+50% or more), and the strong move and volume takes many positioned trend traders out of the market (quickly). I began exploring this trade pattern after learning about it from Alan Farley in his book, Master Swing Trader. He has a brief description on his web site (under the “Power Spike” set up), although I will disclose
I have personally found monitoring market shock events helpful in identifying (early) possible changes in trend or direction. Once the shock event happens, the normal feel of the markets is quickly stunted (e.g., shocked), and succeeding shock events in the same direction can occur quickly which successfully change the trend. Let’s look at an example with an $INDU chart.
http://tinyurl.com/ljuqvya (the last period of shock events in 2014)
As seen in January, shock events quickly destabilize price enough that declines may continue. This dynamic alters the success of JBTFD, because the predictable buy point disappears.
Some Market Internals (under the surface)
http://tinyurl.com/ncnj6rs (Tech selling came with increasing volume)
http://tinyurl.com/oueob6t (and so did NYSE selling)
http://tinyurl.com/ldbkyqe (Clear mid-term damage on the $SPX charts)
http://tinyurl.com/yhkfxcm (NYSE advance-decline line turns down strongly)
On this Friday, I am looking for another (minor) shock event, which it looks like we will get by the open. Once a major shock event shows up (like Thursday), minor after shocks are not uncommon over the couple of weeks or so. The process creates a period of traders (on both sides) questioning the markets. This dynamic can also often result in a sideways motion, while larger hands (e.g., institutions) take the time to assess damage from the declines.
That’s all for now. Once again with my bearish paws together and a slight bow of my head, I bid you “Namaste!” and wish you “Good Luck” with your own trading (Luck = Preparation + Opportunity + a little Risk).