The Plunge

No, I am neither prescient nor do I have a pipeline into the trading centers that have a great deal of influence on stock trading. That said, it appeared to me yesterday morning that the Stock Market was nearing its top and a downward slide was quite likely. This prediction was born out within a few hours.

Today, I would like to discourse not on what was done but how.

If you listen to the pundits on TV, you come away with the impression that what made the Market go down was the fear created by the financial crisis in Europe and some trading errors. Of course, the financial crisis in Europe has been known for a while, though TV pundits tried their best to ignore the IMPORTANCE of it.

What happened was this: The Market was shaky, the DJI rise had become almost flat. It became vulnerable for a retreat. In came the trading houses and put in an avalanche of sales orders. Sophisticated traders have stop losses of 10-15%, so if a stock drops the 10 or 15%, it is automatically sold. This causes an imbalance (too many sellers, very few buyers) and the price of the stock begins to plunge. If you have a stock that is selling for $44/share and you have a stop loss at $36, it means that as soon as the stock goes below $36/share, a sell order will go in. Hyeah, but when will it be executed? The sell order goes into a cue and may sit there, while the price of the stock plunges to $32/share or even below. That is what happened yesterday. Many stocks plunged 50-60% and market makers cleaned them up at a bargain. Was there manipulation? You bet! Eight stocks went to 1 penny or zero for no reason at all, except for the manipulation.

Was early yesterday the top of the Market? We won't know that until the Market rallies again and then goes down. Right now, I would think that the Market will come back, but gold continue to rally after it, too, takes a breather.

I reproduced the DOW and its 300 DMA (top graph) and 200 DMA (lower graph. The top graph shows that the 300 DMA did not penetrate the 50 DMA. The 200 DMA, however, did penetrate the 50 DMA. Therefore, this plunge was more like a stiff correction then the topping out. As the financial crisis deepens in Europe, the Market will shake and gold will go higher.