Market Takes a Breather and Drops over 9% in 4 Days

Dow_Jones_week_aug_24

What a difference a week makes! Last Tuesday, the Dow closed around 17500. Today the Dow closed at 15781, about 9.3% lower – erasing all its gains for the year.

Of course all the market talking heads have plenty to say about it after the fact, but what were they saying before it happened? If they don’t have the ability to warn of impending market reversals, then how much weight should you put in their “after market” analysis?

Mega moves like this is a great illustration of why one should always employ stop losses and risk management when in the market. The only absolute control you have is when you enter the market and when you exit.

It’s a guaranteed fact that there were traders who were long in this market without employing any stop losses. It’s also a near guarantee that those traders had their accounts wiped out.

It’s also likely that there are traders who were short without using stops, and those who didn’t blow up their accounts with the market’s move up during this year likely made a killing these last few days, but these type of traders are doomed to give their returns back to the market because eventually they will be on the wrong side of a massive move and suffer the same fate as the traders who wiped out their accounts. Trading without using stop losses is equivalent to engaging in Russian Roulette on a continual basis- it’s not a question of if you will suffer devastating losses, but when.

The true professionals love downdrafts like this as they look for some good bargains that were oversold due to excessive fear. Of course low prices can head even lower, so risk management and stop losses are still needed.

Those like myself, analyzing market price behavior, have been given a golden year of data. The market spent several months in a pretty narrow trading range that heavily favored a delta neutral style of trading. The big drops now favor trending and momentum players. Seeing how the market behaves in both a tight range and trending environment provides great insight opportunities.

 

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3 thoughts on “Market Takes a Breather and Drops over 9% in 4 Days

    • I haven’t focused much attention to it, but it appears to be mirroring our dot-com period NASDAQ market- from a can do no wrong to just the opposite- driven by the basic elements of greed going up and fear going down.

      It’s hard to say how it will play out based on the Chinese government’s heavy hand in trying to control it. Eventually the market will arrive at a consensus despite government interference, but the volatility should keep things interesting.

      It’s also worth noting that the US market “seems” more stable, but that’s due to successful Fed interference, and eventually the US will correct to a true market consensus given enough time. Markets that only move in one direction for an extended time take on bubble associated risks.

      Like

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