The markets continue the upward trek. Considering the instability that underlies the broad indexes currently, a review of the NYSE's circuit breaker levels appears in order. Circuit-breakers represent the thresholds where trading is halted for single-day declines in the Dow Jones Industrial Average (DJIA). The circuit breakers are set each quarter by the NYSE and the last news release for this quarter is found at the link below.
For the first quarter of 2012, January-February-March, the following actions would take place in the event that the markets experience a strong waterfall selling event:
Level 1 Halt: A 1,200-point drop in the DJIA before 2 PM EST will halt trading for one hour; if the drop occurs between 2:00 PM and 2:30 PM, trading will be halted for 30 minutes; and if the drop occurs after 2:30 PM, there is no effect.
Level 2 Halt: A 2,400-point drop in the DJIA before 1 PM EST will halt trading for two hours; if the drop occurs between 1 PM and 2:00 PM, trading will be halted for one hour; and if the drop occurs after 2:00 PM, trading is stopped for the remainder of the day.
Level 3 Halt: A 3,600-point drop in the DJIA will halt trading for the remainder of the day regardless of when the decline occurs.
On April 2, 2012, the NYSE will release the new circuit breaker levels for the second quarter of 2012, April-May-June.
http://www.nyse.com/press/1325241963301.html
Thus, from the Dow's current round number at 13K, a Level 1 Halt would trigger if price dropped down to 11,800 during any given day. The Level 2 Halt would trigger at 10,600 while the Level 3 Halt would trigger at 9,400. Of course these levels would move up if the Dow continues upwards.
For comparison, the Dow dropped 1,000 points in the Flash Crash on 5/6/10 at about 2:45 PM EST. An SEC and CFTC report attempted to identify the factors at play during the crash, which remain somewhat of a mystery, but most folks blame it on the high-frequency trading (HFT) robots. Interestingly, the report "portrayed a market so fragmented and fragile that a single large trade could send stocks into a sudden spiral." The immensely-large participation of AAPL in the recent broad market rally cannot be understated, and with a parabolic negatively diverged daily chart in place now, is cause for serious concern.
Keystone can easily make strong bull and bear cases simultaneously for any market at any time. Currently, Keybot the Quant, Keystone's proprietary algo (continuously displayed in the left margin) holds the core position long. The algorithm moves thru the trading year with the smoothest path possible alternating between long and short. The bullish side has essentially been in place for the algo since 12/20/11. Keystone's technical analysis on this site targets the more speculative and dangerous side of trading, top and bottom calling, divergence trading, and other high risk-high reward strategies. At this point in time, Keystone's shorter term work continues to look for a market top in this zone, right now, and would not be surprised with a market pull back at any time. After the markets sell off, a move back up is likely to occur, but, first let's see the pull back occur and how the dip-buyers react.
The geopolitical concerns in place today across the Middle East, Syria, Iran, Iraq, North Korea, the ongoing wars that appear to be worsening not improving, the low market volume, the low volatility with VIX drifting lower each day, the low CPC Put/Call numbers, the bullish complacency, the Transportation Index diverging from the Dow Industrials (Dow Theory), the small caps underperforming the last few days, approximately 90% of S&P stocks are above their 150-day MA, the COT reports leaning bearish, uber bullish sentiment with minimal bearish sentiment, newsletter bullishness not seen in years, new highs trailing lower as price prints higher, strong insider selling, inflows to funds remaining weak, one stock--AAPL supporting this last leg up for the broad indexes, the seasonal tech selling that will be occurring now, traders avoiding the inverse ETF's, the short interest numbers, and the total number of folks employed are actually lower than prior years despite a drop in the unemployment rate, are all bearish indications, and all add up to a worrisome market picture moving forward.
Importantly, a Saudi oil pipeline explosion was rumored to occur in late session trading which caused a spike in Brent over 128 and WTIC Oil hit 110. In this technological age, we still do not know if it was a rumor or real event. This example occuring now illustrates the geopolitical turmoil. Meanwhile, the consumer staples sector, known for being one of the safer sectors that tend to fall less when markets sell off, were the worse performing sector in the markets today. This illustrates the complacency with traders; why would you buy defensive positions when you think the markets will continuously move upwards? Stay alert.
Therefore, it is always best to plan ahead for any outcome.
Keybot, during times like these, why would traders avoid inverse ETF's?
ReplyDeleteAnde
KS, this posts almost sounds like an omen of things to come. I still can't believe that this market is continuing to creep up like this via the low volume. Granville has called for a 4000 point drop in the DOW this year. Thanks again for your wonderful insights and information.
ReplyDeleteSteve
Hello Ande, the aversion towards inverse ETF's illustrates the complacency, lack of fear, by traders curently. They are not interested in inverse ETF's since they feel the markets will go up forever. In other words, this is a contrarian indication. The boat is fully loaded with the long bullish ETF's, when the boat is fully loaded to one side, it capsizes. (when you see a strong consensus in one direction it is typcially wrong)
ReplyDeleteHello Steve, you never know what may happen, it is always best to at a minimum know what risks are out there. One of the reasons this was posted is to simply alert novice traders that circuit breakers on markets do exist and they exist for a reason, since an outlier event is always possible like the Flash Crash. Stay nimble and alert moving forward.
Even though the markets seem, and are, constantly green lately, note that the last four days or so the SPX is only moving sideways thru 1368-1376, a measley 8 point range (ignoring some quick outward spikes in each direction). AAPL is the markets and the markets are Apple. Watch AAPL like a hawk.