I see price swings a lot in terms of volatility. Already today the Dow 30 came back into its historically 'normal' volatility range, looked at as INDU Closing not more than 5 percent below its 21-day moving average.


"... there was sure panic on monday. Were you surprised and how do you see the aftermath?"


Going into the weekend, I was thinking a bottom could be near. I especially DIDN'T think and I said so that we would see a whole new down LEG after INDU was already well below (5%) its 21-day moving average. The moving average envelope indicator allows setting lines that measure X percent above/below any moving average. I've worked with 21-day input on daily charts and a Fibonacci number; always with stock INDICES, not stocks themselves. But the 21-day average is consistent for the indices. AND it's quite rare, usually a matter of days only, that a major index like the Dow or the S&P closes MORE than 5 percent below their 21-day moving averages. The Nasdaq can go to 7 percent below at stressful/panic 'waterfall' type declines.


Going into (this past) Friday I was thinking there could be a Monday rebound but of course China got very much worse and oil prices were IN a new down 'leg'. There was fear and panic in the air, especially radiating from China but it didn't look like the Dow was going to fall off a cliff.

Then again, it (the Dow falling off a 'cliff') didn't so much look to be happening in October 1987 EITHER, specifically following Friday 10/16/87 when the Dow was down sharply, closing at 2246, down 109 points or off nearly 5%. I thought the bears had enough blood in the water by then. I was going to be in a seminar-room overlooking the CBOE trading floor on the following Monday (10/19/87), later known as "Black Monday". Not hard to figure WHY black Monday as the Dow plummeted 508 points, to Close at 1738 or DOWN 18 percent! That Monday in October '87 saw 'fear and loathing' run rampant in the Street!

AND, here's why I 'anchor' that so-called (Oct, 1987) "Black Monday" to subsequent big 'waterfall' type panic declines, is that Monday in 1987 was the FIRST time that computerized trading strategies ('hedging' in this case) contributed significantly to the downside slide as a lot of concentrated selling got unleashed. In our current era, we got even more pile on selling by programmed trading programs and their 'algorithms' that feast on the accelerated momentum and volume in a panic situation. I'm not saying that the Market wouldn't be down sharply, but the speed and amount of the sell off would almost surely be less severe.

What I would also point out with the current Dow chart pattern in RELATION TO its '87 sell off, was the direction things took AFTER the blood letting of a quick 20-25% drop in blue chips. That chart to follow this one. The Dow in this first chart was trading up to around 3% over its 21-day average, with a couple of instances in the period shown of dips to about 5% under.

My next chart shows the Dow for a long period AFTER the 1987 panic sell-off (into Black Monday), where computerized trading programs FIRST made their 'mark'. A MARK made by being blamed for a huge amount of unnecessary selling, completely unrelated to the underlying fundamentals of the economy and the Market at that time.

As I said in my Saturday Index Wrap, the 'last' thing I'd expect when the Dow trades down to 5% below this particular (21-day)'centered' moving average is for the Dow to THEN have a further and bigger waterfall decline; a whole new down leg! Nothing like the whipsaw of a bubble bursting to remind me of these rare black swan events and to get investors back down to reality!!

Unlike the 10 days in 1987 before the Dow snapped back to its prior 'volatility' range, today INDU is already back to (slightly) above its lower 5% envelope line. What I thought of all this was that whatever the price level would be, the Dow would relatively SOON be back trading ABOVE its lower trading 'band'; i.e., it's minus 5% moving average 'envelope' line.

I wouldn't project that the Dow is going to be up, up and away, from it most recent low but INDU could be mostly back into and above the highlighted GREEN lower line representing an historical tendency for the Dow to trade back closer to its 21-day moving average. Of course, current and 21-day average values converge over time but the 21-trading period time span is an ideal 'length' setting in the moving average envelope indicator.