Can the Market Recover from “The Flash Crash?”
Posted by Gregory Guest at 5/11/2010 4:37 PM 
Categories: Market Updates
Tags: The Flash Crash bear market market volitility
Categories: Market Updates
Tags: The Flash Crash bear market market volitility
Market Update 2010-05-11
Contributed by Charles Guest, SinoCentury Guest Commentator
A lot has happened since my last update on April 14th. At that time the S&P 500 Index had just closed at 1197 and I wrote that it would likely continue to run up to the 1225 level, at which point we would encounter a major crossroads in the market. I was off by 5, with the S&P 500 reaching 1220 points intraday on April 23rd. Since then it has been in a decidedly bearish mood, including a spectacular selloff on April 6th. So what should we be watching now?
The market is trying to recover from last week’s huge selloff as I write. Once again, I am watching the Fibonacci retracement numbers. Resistance would be expected between S&P 1164 (the recent decline’s 50% retracement level) and 1173 (its 61.8% retracement level). To refresh your memory, Fibonacci retracements are watched by traders, who are about the only ones playing the market now. True to form, today the market sold off at the 1170 level and closed down at 1156. It just could not break through resistance today. I cannot say how this will end, but if the market can clear 1173 for more than a few days, it could once again approach the 1225 level. If not, we will likely go back to or below the 1110 level we closed at after “The Flash Crash” on May 6th. Either way, I expect quite a bit of volatility the next few days.
Also note that gold is now trading at a new all-time high. If it can hold here, it is likely to make a new major move up. I believe the recent price gain is in response to the European bailout plan. The European Central Bank, which was the last bastion of hard money, has now caved. And to add insult to injury, our own Federal Reserve Bank is now engaging in swaps with the ECB. I did a little research on this today. The Fed will swap dollars for Euros at current exchange rates. The ECB will swap them back to us at some future date at the same “fixed” exchange rate, at which time I would guess the Euro will be worth much less. Sounds like a good deal for American taxpayers and another nail in the coffin for the U.S. Dollar!
It is a sorry world. If you want some insurance, I would once again recommend and am still accumulating the ProShares Short S&P 500 ETF (SH ), which is an exchange traded fund that trades at approximately the inverse of the daily return of the S&P 500 Index. And if you don't own gold or gold stocks already, what are you waiting for? For a play on gold mining shares, I own the Market Vectors Gold Miners ETF (GDX ). For a play on the price of the precious metal itself, you may consider owning the SPDR Gold Trust (GLD ), but beware that as a commodity fund GLD is set up as a publicly-traded partnership and will generate a little K-1 form headache each year at tax time if you own it outside of a retirement account. Meanwhile, happy investing. And as always, we will know more later!
Contributed by Charles Guest, SinoCentury Guest Commentator
A lot has happened since my last update on April 14th. At that time the S&P 500 Index had just closed at 1197 and I wrote that it would likely continue to run up to the 1225 level, at which point we would encounter a major crossroads in the market. I was off by 5, with the S&P 500 reaching 1220 points intraday on April 23rd. Since then it has been in a decidedly bearish mood, including a spectacular selloff on April 6th. So what should we be watching now?
The market is trying to recover from last week’s huge selloff as I write. Once again, I am watching the Fibonacci retracement numbers. Resistance would be expected between S&P 1164 (the recent decline’s 50% retracement level) and 1173 (its 61.8% retracement level). To refresh your memory, Fibonacci retracements are watched by traders, who are about the only ones playing the market now. True to form, today the market sold off at the 1170 level and closed down at 1156. It just could not break through resistance today. I cannot say how this will end, but if the market can clear 1173 for more than a few days, it could once again approach the 1225 level. If not, we will likely go back to or below the 1110 level we closed at after “The Flash Crash” on May 6th. Either way, I expect quite a bit of volatility the next few days.
Also note that gold is now trading at a new all-time high. If it can hold here, it is likely to make a new major move up. I believe the recent price gain is in response to the European bailout plan. The European Central Bank, which was the last bastion of hard money, has now caved. And to add insult to injury, our own Federal Reserve Bank is now engaging in swaps with the ECB. I did a little research on this today. The Fed will swap dollars for Euros at current exchange rates. The ECB will swap them back to us at some future date at the same “fixed” exchange rate, at which time I would guess the Euro will be worth much less. Sounds like a good deal for American taxpayers and another nail in the coffin for the U.S. Dollar!
It is a sorry world. If you want some insurance, I would once again recommend and am still accumulating the ProShares Short S&P 500 ETF (SH ), which is an exchange traded fund that trades at approximately the inverse of the daily return of the S&P 500 Index. And if you don't own gold or gold stocks already, what are you waiting for? For a play on gold mining shares, I own the Market Vectors Gold Miners ETF (GDX ). For a play on the price of the precious metal itself, you may consider owning the SPDR Gold Trust (GLD ), but beware that as a commodity fund GLD is set up as a publicly-traded partnership and will generate a little K-1 form headache each year at tax time if you own it outside of a retirement account. Meanwhile, happy investing. And as always, we will know more later!
Whoa - nice new look. Easier to read.
Quick follow up question:
1. I'd like to hear your thoughts on owning GLD vs actual gold. So far, the etf seems to track the underlying pretty closely. But, owning GLD is not the same as owning gold, so I'm curious as to what you think.
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