First came 2001 after the tragedy of September 11. Next came the days of Bear Stearns and Lehman Brothers in the fall of 2008. Here we are in August, 2011 and the fear is back.
Our friend, the VIX, is back above 40 indicating volatility rules our days. That is an understatement, as we see intraday swings of up to 900 points on the DJIA – the type of move that used to take weeks to accomplish!
I read an article on Yahoo! Finance today talking about the use of technical analysis and computerized trading in these large swings we are experiencing. In days of yesteryear, it took multiple trading days to move the S&P 50 points. Right now that is an almost daily occurrence, in no small part due to computers programmed to analyze charts and execute trades based on mathematical algorithms – with no human intervention.
As technical traders, we talk about levels of support and resistance, both short term and long term, for the equities and ETF’s that we trade. We discuss strategies to implement when technical levels are violated. As these techniques become programmed into the automated systems used to trade, they become somewhat self-fulfilling. For example, on Monday, August 8, the S&P broke through a technical level of support around 1172 shortly after 11:00 am E.T. After a brief respite at that level, a second round of selling occurred taking the index to another support level of 1138 by 2 p.m. After hovering at that level a while, sellers (i.e. computers?) came in again and sold the market down 6.6% on the day, closing at 1119.
This type of rapid market swing occurs to the upside as well. On Tuesday, after being down much of the day, the S&P closed up on the day by almost 52 points, with an intraday swing of 70 points. Most of that up move occurred in the last hour of trading. Do human hands actually work that fast? I wonder…
So, what can we do? As traders, it is important that we realize the machines are there and that they can, at times, appear to “take over”. That being said, the underlying truth about the market hasn’t changed over time: The market represents what investors are willing to pay today for future corporate earnings. It may not feel that way on certain days, like Monday, but it has proven itself time and time again. It will this time too. It’s times like these that I am most grateful for the education I received at OptionsANIMAL to prepare me for the uncertainty of today’s markets.