Daily Reflection: 05.06

Lots to talk about today, at one point the /ES was moving 10 points in less than 10 seconds, enormous volume and volatility spiking into the 40s. Rather than spend your energy trying to find out the WHAT, let us focus on where to go from here, and what action can be taken to manage positions and how to execute new positions. The chart below says it all with the DOW spiking below 10,000 intraday, down nearly 1,000 points.

The markets are in a fragile state and while technology has advanced tremendously over the years, it simply speeds up the process of order execution. The inevitable is, well, inevitable. So what to do now? It's clear the global banking system is in trouble, ethics, and client interest have been compromised, but the markets don't care about any of this, it is simply an effect of collective human emotions.

Hindsight is 20/20, but what we have talked about in days past is the TRIN and the key levels, that being, a close above 2.0. On Wednesday the TRIN closed at 2.51, we then failed to rally the following day, which indicates the possibility of a severe decline. While these kinds of market reactions are impossible to predict, the TRIN did throw up a red flag.

Yesterday we talked about the Put/Call Ratio and a close of 1.15. This had a large part to do with the decline today. Huge amounts of stock had been acquired since the lows of March 2009 and investors and traders place stop orders all the way up. The cause of today’s market action is irrelevant, what is important to know is when millions of people are looking to sell at $50, and there are only 10 people looking to buy, they can essentially dictate their price, and say, throw out a bid of $10. With no one in-between these two prices, the price of the stock will drop dramatically.