October 11 2008 Friday Volatility in the Dow Industrials

Climax day? Abject Capitulation? Surrender? Throwing in the towel? Who knows?

Friday, in another example of bungee markets the Dow transversed 1000 points like a squirrel on meth running up and down a tree. We have called these markets bungee markets and squirrel markets. It reminds us of the time our golden retriever Rosebud (named for the sleigh (or Marion Davies)) ate the kid’s chocolate birthday cake (entire) and then proceeded to act like the Dow for a couple of hours running frantically to and fro.

Traders we know were (like the dog) madly buying stocks and indices late Friday “because they were cheap”. Our readers should note that these traders are playing the automatic bounce. They expect a rally (vicious) here. And so do we. And then they expect the rally to fizzle and they expect more bear market. So do we. But we don’t bet on what we expect. We bet on the analysis of the chart, and the chart only has bars up to today. It has no bars for tomorrow. But we know what to do tomorrow. Watch with interest as the dogs, squirrels, meth merchants and traders play tag with each other. Our stop is so far away that it might as well be on the moon.

So what about Friday? Traders were buying because blood was running in the Street. Baron de Rothschild was famous for saying, “I buy when there is blood running in the streets.” In fact as seen in the 10 minute chart there was a volume climax on the close (and for the day). Volume climaxes often mark wave high and low points. The highest volume did occur on down bars however.

10 minute chart of industrials

And the daily pattern while interesting doesn’t look like a classic one day reversal pattern. We wouldn’t bet on it as such. But what is there these days that observes the classical niceties?

Daily chart of industrials

At this moment (and what is there but discreet moments in these markets?) whether the markets will open up 500 points or continue down is up in the air (or up in the tree with the squirrels). Depends on what the Gang of Seven finance ministers does before the markets open Monday. One thing is certain. Traders should have liquidated their shorts Friday on the close, and we think that is what happened. As for buying? Remember the falling knife we talked about last time? Got the iodine and the bandages handy?

Everyone is talking about not wanting to miss the bottom. Reminds us of the travelers who rushed to make the sailing of the Titanic. Maybe it won’t sink. Who knows?