Much has been rightly made of the ‘flash crash’ which occurred on May 6. It is still not known exactly what caused it nor is it known whether it was human error, computer error, or a combination of both. But what there is little doubt of in my mind anyway is that the problem has not been fixed. There have been mini-bursts of activity reminiscent of that particular session many times. We saw one such spate of motion on Friday afternoon. Let me backtrack for a second- for those who do not remember, the market gapped sharply lower on Friday, rallied tremendously, and then slowly gave back the early gains for much of the day. Suddenly, starting at 3:39PM, the S&P launched almost 1.5% into the bell. Part of it was short covering of course, part of it was relief, part of it was a reflex move after the day’s initial tremendous rally….I get all that. But it was a very bizarre rush of a move suddenly late on a Friday afternoon. In any case, this is the market we’re in and these are the moves we’re having. As day traders, we need to adapt to them. That late Friday spike actually set the stage for the activity yesterday morning. Any whiff of bad news was to be ‘overreacted to’ because of the move higher; this is why Dow futures traded down 120 points (almost the entire spike) before the pen Monday morning and helped contribute to the weakness of the broader tape yesterday (well, that and the euro retracing as well). Thus now more than ever, day traders need to focus upon seemingly unusual movement in equity prices because an opposite reaction will likely happen at some point shortly thereafter.
Markets overnight were hit very hard throughout the world. The Asian markets were down anywhere from 3% in Tokyo to 3.5% in Hong Kong. The losses are about as steep in Europe with the FTSE and DAX down about 3% with Spain down almost 5%. The euro is getting crushed as the gains from last week’s rally have now evaporated. Gold is down about 0.5% with oil down 4%. The two main triggers are quite disparate but both disturbing. A number of regional banks are consolidating which seems to imply some trouble within their system as regulators are nudging lenders to merge with stronger partners after the IMF yesterday said that Spain needed to overhaul the condition of its financial institutions. Then, there were belligerent comments made by the North Korean government which will likely ring hollow, but the bellicose words have put that nation as close to war as it has been since the Korean Conflict stopped in the 1950’s. This is leading to a major down move for futures with the Dow down about 220 as of this writing (albeit 50 off of its overnight low). I don’t think the markets bounce back quite the way they did on Friday. The euro crumbling and the North Korean worries plus the increasing nervousness over Spain are major overhangs. There will likely be an attempt to uptick, but I think it gives way to another wave of selling. The euro’s performance (or lack thereof) will likely set the tone for the balance of the day. Focus only on big caps and trade in much smaller size than normal with an eye toward relative strength and weakness plays in particular. It is a total momentum market, but one fraught with peril (and opportunity).
Reiterating-
If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.
If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-
Good- The following stocks have good news and/or a strong technical pattern
NBIX- positive phase II results for its endometriosis drug
SUNH- splitting into two publicly traded firms
NCR- Greenlight Capital filed a 13G on the stock
SD, PRGO- mentioned on “Mad Money” last night
Bad-The following stocks have bad news and/or a weak technical pattern
DRH- 20 million share offering
AIR- warned on earnings outlook
IRE- closed near a low
GS- closed near a low
RIG- closed near a low
X- closed near a low
FCX- closed near a low
IOC- closed near a low
AIG- closed near a low
BP- closed near a low
WYNN- closed near a low
TSL- poor earnings
Earnings:
TUES MAY 25 BEFORE
AZO CBRL DSW
FLO MDT SAFM
TSL
TUES MAY 25 AFTER
TIVO
Good luck today.
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
Joseph R. McCandless- Managing Partner
D. Timothy Seaquist- Managing Partner
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