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Thursday, May 6, 2010

All Your Stop Loss Are Belong to Us

Here is the test from a Dow Jones news release I saw shortly after the Big Drop:


  A human trading error at a "major firm" is to blame for the huge plunge the stock market suffered Thursday afternoon, CNBC reported, citing several sources.

  Fox Business Network, meanwhile, cited sources that said a bad trade caused Procter & Gamble's stock to drop so dramatically Thursday afternoon. The New York Stock Exchange reported no system error, according to CNBC.


  -Dow Jones Newswires; 212-416-2900
   May 06, 2010 15:55 ET (19:55 GMT)

CNBC, huh? Yeah, pull the other one.

The supposed epicenter of the event, PG, where a fat finger supposedly sent an order for a billion shares that was supposed to be a million. Riiiiiiiight.

Of course, the natural reaction to a drop in PG is to rush into gold, right? Anyone?

About 100 points in the SPX, top to bottom (and 1000 points on the Dow). There is one problem I have with the "fat finger" theory: we were already below a critical level (1150) and headed down when the carnage started. Bids fell through the floor, stop loss orders were taken out in droves, and we fell with seemingly no support for several minutes. Then just as abruptly, we bounced back up, as if somebody (or some machine) was sitting and waiting for this to happen.

Just like 2008, the dollar strength is gaining momentum. At that time it resulted in a stock crash. We would expect everything else to play along, but gold didn't. Something is wrong with this picture.

Crude oil, which had been in a bullish pattern, has abruptly reversed course and today hit the 200dma. We appear to be headed for the low end of the range, in the low 70's, but ultimately can go a lot lower than that. This is good old deflation, and if you've been a loyal, patriotic American and have leveraged yourself up to the hilt, you are going to feel some pain. If you are one of those paranoid freaks that is sitting on a mattress stuffed with cash, you will be able to relieve your fellow Americans from their assets for pennies on the dollar. Sometimes it pays to be paranoid.

Today's drop had "HFT" written all over it. Whether it was indeed an accident, or they were going after stops, or whatever the hell they were doing, we just saw what happens when the computers drop their bids. Like the oil spill in the Gulf, we wiull see more of this in the future.

All your stops are belong to us.

I will have the new highs update in a bit.

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