Ready For Another Flash Crash?

Investors witnessed an element of trade that has been prevalent in 2010. It's been especially pronounced in each of the three months from October through December; where very low participation levels have allowed little upside resistance to form to stop specialists getting equity and commodity values where they needed them to be. It is an old cliché that price action without volume is in general unsustainable, and at best creates intra-day volatility. But tenured traders will advise that low volume is a danger when risk markets are on their way down.

In 2009, investors saw an equity recovery in S&P trade that reversed a March low of 665 to finish the year at 1140, in a +40% rally that few seemed to enjoy, few trusted, and few were involved in when looking at volume levels. The 2009 long-sided volume was anemic when compared to the 2008-2009 S&P 500 drop from 1520 that created a high-volume +55% reversal that many, unfortunately then were a part of.

In 2010 investors saw a slow and steady, low-participation 15% crawl higher in S&P 500 trade, from 1040 to 1215, which was wiped out in one week of high-volume selling in May. The May flash-crash has taken seven months to reverse, on low volume ramps that once again few seem to be enjoying. And looking at the historic amounts of redemptions from equity markets, few have been involved in. Once-bitten by low volume ramp ups has created a twice-shy fear of short-sided volume moves that tend to be violent, quick, and out of the blue.

The German Dax issued a warning of potential dangers to come unless volume/participation levels soon start to increase, with a high-volume drop in trade on Monday that looks as though it will be hard to reverse in the near-term. What took a whole month of December trade to build, (with price action unable to break and hold near-term pivot point support or resistance areas) was taken away in a 15 minute period of trade when a high-volume reversal crashed through low-volume support that had been tenuously put in place on the way up.

Click to enlarge:

TheLFB German Dax December

The impact was felt because of thin Bank Holiday trading in other regions. This came at the start of a week that will be interrupted by further Holiday breaks and was in reaction to a December 25th interest rate hike from China. This, in turn, was fed off a low-participation trading arena. The mantra has to be to bank early and bank often, to be a part of the trend and price action direction, and to be very aware that at 2am, 7am, and 11am ET the futures market will react to regional markets opening and closing, and will be more at risk at those times than at any other.

Click to enlarge:

TheLFB German Dax 15-Minute Reversal

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: TheLFB runs an automated trading program that is constantly one side of the dollar or the other, in-line with the detail posted in the article.

Source: Ready For Another Flash Crash?