Sudden Selloff Cycle Tanks Markets

2020-06-11 | Simpler Trading Team

The stock market cycled hard today and dashed the hopes of traders looking to ride higher on the long side.

The scene was like a movie we’ve seen over and over again.

When the pool of buyers runs dry, the market gaps down and the selling begins. This is followed by panic selling, and the market always crashes faster than it rises.

This market cycle slammed the indexes.

The Dow closed at 25,128.17 points to fall 6.90% (dropping 1,861 points on the day). The Nasdaq dropped to 9,588.48 points for a 5.01% tumble while the S&P 500 crumbled 5.89% to 3,002.10 points.

Full-time traders at Simpler Trading maintained cash on the sidelines, but some took advantage of the spiraling short moves.

Something for traders to consider are the dynamics of this selloff.

Internal indicators showed yesterday that the market was far extended to the long side — top-heavy with traders banking on further long moves.

It was similar to market conditions in February before the Covid-19 event and the selloff that followed to crash the market.

Any significant event or news can send a bloated long market gapping down. The market appears to not have liked the Fed news yesterday and the overnight selling began.

Thursday’s session only worsened after opening more than 800 points down. It was the Dow’s worst day since March.

Top stocks in key sectors took hard hits today. This included “pandemic-insulated” stocks that have held up through the crisis because of their products, like Netflix, Clorox, Amazon, etc.

Expectations are that the shift in sentiment won’t last. A gap down in a cycle is historically followed by an upside move.

Another part of this dynamic is there are more than 3.6 million new trading accounts in the market in 2020. Many of these are credited to people who turned government stimulus money into trading accounts.

Market sentiment is that these newer traders learn to buy with hopes of a long market and profits. But their focus is on calls to the long side, and they haven’t developed skills for more complex trading setups.

With limited skills, newer traders’ abilities to shift gears to the short side struggle when the market suddenly cycles.

The “Long Run” band in this market cycle kept playing when the rally went up in flames. Traders need to understand when to stop partying and avoid being the last one out the door in a fiery selloff.

We Saw: Feverish selloff dismantles major indexes — 

  • Nasdaq fell from record 10,000 to 9,588 on the day
  • Dow crumbles 1,861 points
  • S&P 500 tanked 5.89%

We’re Watching: … bounce-back strength of key sector stocks —

  • TSLA slumps, can it regain $1,000?
  • Battered again, where will oil go?
  • Who’s right: collapse is upon us or rally to normal in the works?

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