The market crashed on Friday (again), now what?

[caption id="attachment_754" align="aligncenter" width="500" caption="SPY"][SPY][][/caption]

[caption id="attachment_755" align="aligncenter" width="500" caption="S&P intraday"][S&P intraday][][/caption]

Just when I thought I don't have to watch the market every hour and left for the afternoon, the S&P 500 crashed 40 points in the last hour on Friday. In particular, the move in the last 5 minutes was vertical for all intents and purposes!

Looking at the TICK and Advance-Decline line, there doesn't seem to be a broad sell-off as the panic-like move would suggest. This seems like a concentrated sell-off effort. Which might suggest of an artificial move directed for the G20 meeting this weekend. Read that with a grain of salt though, this is wild speculation at best.

Actually, what's important is that Thursday's rally energy didn't carry over to Friday. Notice on Figure 1 that even the mid-day 870 reversal didn't pack much punch. We have double topped with a lower volume weighted MACD (Figure 1). This is a bad bearing divergence. 920 would have been a good point to unload when the volume didn't pick up. But I was away anyway, and I doubt I would have the insight at the time to unload.

On the other hand, we are still above my line in the sand at 865. And as I've mentioned before, the TICK and A-D line are giving a neutral reading. My short term bullishness hasn't died yet, but we could very well retest 820 before moving up. Even worse, I am now accepting the possiblity of continued weakness in the market due to lack of steam. Bull shakeout or not, this pre-weekend stunt has definitely shaken many bulls.

I will watch the market next week and decide what I'll do with my long positions. At this point, I am inclined to unload my short puts some time next week to reduce my downside. As for my calls, with just another week until option expiration, I would rather hang on to them to position myself for a rally. I got my calls all for dirt cheap anyway, so they are entirely disposable if they expire next week. This is a great example of my trading rule to always plan for the worst before entering a trade.

Overall, my recent entries are downgraded from a high reward, low risk, high probability play to a high reward, low risk, low probability play.

On a sidenote, one thing I noticed in the past two days is that there doesn't seem to be any report from the mass media at all. The Thursday 95-point rally and Friday last minute crash were unnoticed by the general public. These type of roller coaster volatilities seem to be part of normal day lives nowadays.

[SPY]: http://traderpau.files.wordpress.com/2008/11/2008-11-16-spy2.png [S&P intraday]: http://traderpau.files.wordpress.com/2008/11/2008-11-16-spxintra.png