The real reason prices crashed Thursday and why we can ignore it

By Jani Ziedins | End of Day Analysis

Dec 22

Free After-Hours Analysis:

The S&P 500 crashed more than 100 points Thursday morning after someone yelled “Fire” and impulsive traders climbed over each other trying to get out.

What was the catalyst for Thursday’s selling? Easy, there wasn’t one. This panic was nothing more than impulsive traders getting spooked by their own shadows and then the herd following them out the door.

But this isn’t a surprise. This was the second to last trading session before the Christmas holiday and institutional investors are already at their vacation chalets. Without big money’s guiding hand, there was no one to keep impulsive retail traders in check, and like irresponsible teenagers given too much responsibility, these retail traders made poor decisions.

Lucky for us, these retail traders have small accounts and quickly ran out of things to sell. By early afternoon, supply dried up and the index rebounded 60 points from those oversold levels, easily reclaiming 3,800 support.

As Forest Gump famously said, “Stupid is as stupid does.” And on Thursday, retail traders proved why they have such a poor reputation.

As for how I traded this, I came into Thursday holding long positions that I bought earlier in the week. Lucky for me, I already had a nice profit cushion and moved my stops above my entry points Wednesday, making this a low-risk trade for me.

As much as I wanted to see Wednesday’s rally continue, it didn’t turn out that way and I got dumped out at my trailing stops. To the cynics, that makes me wrong, but if my mistakes end in modestly profitable trades, I can live with that.

And in fact, after pulling the plug at my stops above 3,800 support, the waves of impulsive selling actually allowed me to rebuy those positions under 3,800 when the market bounced a few hours later. So not only did I get out of my previous trade for a small profit, I was able to get back in at even better prices.

If that’s what being wrong looks like, I don’t mind being wrong.

As for what comes next, a big wave of impulsive traders bailed Thursday morning and are no longer a risk to the market. I really liked Thursday afternoon’s bounce and that means I’m already a buyer.

If the selling resumes Friday, no big deal, I get out at my stops and try again next week. And if I’m really lucky, prices crash hard Friday and I get to buy even lower prices.

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.