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Today Feburary 20, 2020, the market had a "mini" 5-min flash crash. As an NQ trader, this event did not go unnoticed. Between 11:30 and 11:35 EST, the NQ dropped 381 ticks ( ~95 points or ~1% )
Looking at my trading data, It appears that such drop is no longer rare. Of course, everyone remembers the May 6, 2010 flash crash where the market lost ~9% in 20 minutes and recovers promptly. On that day the worst 5-min bar was a 401 tick ( -5% ) drop. Today's 5-min crash was only 20 ticks apart.
Going back 15 years. Here are the top 5-min ticks drops. This data shows that 2008 and 2018 presented very good opportunities to make ( or lose ) money.
Predicting days like this are difficult because they happen very rapidly and unexpectedly. I think the only thing we can do is look for clues to see when days like these have a higher probability of occurring. The best tool in my opinion for this is Market/Volume profile. It won't give you entries, but they will give you a better picture of the current market state. A typical candle stick chart makes it appear that we're still in an uptrend with a resistance becoming support. However, the Market Profile lets us know that price has stabilized and we're at fair value. This means that we've reach a point where price is at a point where our big boy sellers and big boy buyers are happy enough that there's not enough force to move price outside of this range. That means without a catalyst price is unlikely to move significantly higher or lower.
(note: all fundamental analysis is opinion and conjecture) The market's reaction to the fed minutes was relatively muted meaning (one explanation) is that the analysts predicted the fed's commentary accurately. However, there are a number of international events occurring right now with the major one being the major quarantine of over 700 million people in China and labor shortages throughout the country. One major hint leading up to this drop was Apple's revenue revisions and Amazon's leaked document of increased purchase orders. It's important to note that because global manufacturing has become very efficient that the majority of large companies order on a Just-in-Time basis meaning that supply that used to become depleted in 6 months is now depleted in 1 to 2 months as businesses only order limited amounts of inventory to decrease overhead costs. The number that shocked the entire market was Philly Fed Manufactoring Index which was previously at 17.0 and predicted to be at 10.1. The actual number was 36.7. Superficially, it means that the business is booming domestically. But because there hasn't been a significant change in the economy, that means that either businesses are hedging or that there are fundamental issues with international manufacturing since labor abroad is significantly cheaper than domestic and has a comparative advantage. Seeing that the earliest vaccines for the China virus are at least a year away, this event will likely spill into the US economy as the majority of consumer goods are manufactured abroad. The market is reflecting on this by repricing assets. Now that we've got the pesky subjective fundamental analysis out of the way, lets look at the charts.
Here is a 60m chart that shows we're making higher highs and resistance has become support and is held perfectly. Without any other context, we would assume that we're in a fairly good position despite being at all time highs. (A Kewltech analyst might say we're in distribution phase, but that rapid drop isn't consistent with a Wyckoffian trend change) So, whatever.
Lets look at the market profile chart and see if we can get more clues. It is important to note that Market Profile is somewhat subjective since a profile can look different to two people. The golden colored are Market hours and the gray are After hours. The first thing that should be immediately apparent is the number of Normal or Neutral days we have which means that there's little if any price movement. Price really isn't interested in moving and price needs a catalyst.
The shocking number was the Manufacturing Index. Again, the number is superficially good, so that results in indecision among market participants and that is consistent with not getting a move until late morning session when the sellers won out. Remember, fair value doesn't tell us if price will rally or drop. All it tells us is that price is calm and is ripe to be shocked by a catalyst to the up or downside. The reason why I mentioned Kewltech is because if my analysis is correct we should try to retest the bottom of the channel and fail resulting in the start of a downtrend. If that is the case then it's going to be short the rips and ride the waterfall down.
Sure. If you are long before the drop starts, your breakeven or stop loss shoud limit the damage. If you are flat, don't try to catch a falling knife. Stay put and wait for an opportunity to go long on the pullback or reversal. If you were already in short position, enjoy the ride, let it rain, but dont' get gready.
It's an interesting proposition. One of the challenges with market profile however is it can't predict day to day sentiment. It can only give you a very low resolution picture, which makes it's usefulness on a day to day limited. As shown in my previous post it can identify value ares, but those are far and few between. I haven't studied the initial balance intra-day trading aspect of market profile in-depth, but from a logical standpoint it should challenging to be able to forecast institutional orders with any kind of consistent accuracy or we'd have a lot more millionaires.
