This story accompanies a report on market volatility that
can be seen here: link.reuters.com/maq33s
By Rodrigo Campos
NEW YORK Aug 19 Before the stormy trading of
August, many stock investors probably thought "death cross" was
the name of some heavy metal band.
But after a period in which the S&P 500 plunged more than 15
percent, daily trading volumes spiked by 70 percent and the
United States lost its vaunted 'triple-A' rating, a death cross
and other technical analysis terms are something investors have
had to become increasingly familiar with.
For chartists and market technicians, the death cross is a
strong bearish signal that indicates a major shift in trading
In the case of the S&P 500, a death cross occurs when the
50-day average for the index sinks below, or crosses over, its
200-day average. (Graphic: r.reuters.com/baq33s)
There was a time on Wall Street when many regarded technical
analysis as something akin to voodoo economics, especially among
stock pickers who specialized in fundamental research. But with
algorithimic trading all the rage, it appears that cold and
dispassionate technical market analysis is coming of age.
The recent market plunge which took the S&P 500 to about
1,100 is a prime of example of why more traders are looking to
technical analysis for guidance. That's because many
computer-driven trading programs are pegged to buy and sell
stocks when certain market levels are breached.
"Computers fire off automatically; you don't have the time
lag you'd have in normal decision making," says Marc Pado, U.S.
technical market strategist at Cantor Fitzgerald & Co. "Clearly
this is not stock picking (but) indiscriminate buying and
Pado says the selling all started when the S&P 500 broke
through the 200-day moving average and a support level of 1,250
on the index. He says, "that started the capitulation to the
downside that we saw in the market overall."
The beauty (or flaw) of technical analysis is that it tells
traders when to buy or sell without regard to corporate earnings
or arguments over how to solve Europe's sovereign debt woes. So
the silver lining of a precipitous drop in stocks is that it
could be a signal for markets to go up.
"By selling off, the market is now discounting the bad
news," said Carter Worth, chief market technician at Oppenheimer
& Co in New York.
Another factor technical analysis focuses on is volatility
and there has been a lot of that lately. In fact, one measure of
volatility doubled in three days and on Aug. 8, when the S&P 500
fell 6.66 percent, the volatility index closed at its highest
level since the market bottomed in March 2009. (Graphic: r.reuters.com/qeq33s)
"It highlights how extreme, how one-sided it was," said
Craig Peskin, co-head of technical analysis research at MF
Global in New York, who noted that every stock in the S&P 500
declined on Aug. 8. "Everyone was treating everything equally."
Some likened what they were seeing in the market to last
year's flash crash, when the Dow Jones Industrials plunged
nearly 1,000 points in 20 minute. Except this time, it appears
to be a flash crash in slow motion.
"We were moving over a three and a half day period like we
were during the flash crash, just more orderly," Peskin said.
"It was totally irrational."
In fact, the week of Aug. 8 was so extreme it even left some
technical analysts scratching their heads at the unusual up and
down trading. On Aug. 9, stocks roared back, with the S&P 500
gaining 4.74 percent and almost wiping out the prior day's
losses. Meanwhile, the Dow industrials would experience six days
trading in swings of more than 400 points.
"I don't have an exact answer on how to label that pattern
from a technical perspective because the volatility was so
extreme," said MF Global's Peskin.
Many market participants say this volatility is not going to
go away. It is a new normal that makes technical analysis a key
rule of the game - even if some dismiss it as market astrology
and don't want to play.
There are also new opportunities, if traders have the
stomach and the correct analysis tools -- and know how to use
"High-frequency traders are moving the markets based on
price action, based on momentum - they don't really care what
they're trading," said Bill Stone, chief strategist for PNC
"They don't care about intrinsic value, they care about some
pattern. So you have days like last week where you get whipsawed
5 and 6 percent from day to day," he said. "Those days can be
scary, but they are also your opportunity because they are
driving (lower) companies that have no reason to be falling so
(Reporting by Rodrigo Campos; additional reporting by Lauren
Tara LaCapra; Editing by Jennifer Ablan, Matthew Goldstein and