Flash Crash and Limit Move Warning in the Stock Market


I just heard a Wall Street 50+ year veteran explain crashes and defaults as "gradually and then suddenly". Trading and investment losses can be like a mirage. It doesn't seem like much at first and then it happens fast. It is important to be pro active in risk management and capital preservation in trading and investing. Gains can also happen gradually and then suddenly as well. You have to be on the right side of the trade though.


This market has been challenging. For our methodology, it isn't the direction of the market but the wild chop intra-day that has been more than normal with the intra-day prop and chop.


The market could resolve from here in either a move higher or move lower with less chop. I tend to think the markets will become choppier and more volatile. I could be wrong though.


This is a warning of what could happen and why.


I prefer an orderly market but there are times when something has been manipulated for so long in one direction that the unwinding of that manipulation is disorderly.


Yesterday is an example of the type of propping that continues to happen to protect those June 16 lows which were based on false premise that the Fed would pivot. Now that the Federal Reserve has not and will not pivot, those June 16th lows are still being protected.


Yesterday, we had several short positions but the market came in and ran to the highs in the afternoon, before rolling over to the middle price of the day. Overnight and today we are seeing the sell off that should have happened yesterday. This has become a common theme.


Today, after a gap down and 30 minutes of selling, we see an effort to prop up the markets. The goal is to create a time correction instead of a price correction.


There have been many layers of "propping" for a long time. A cycle of harsh selling with limit moves and flashy order books would not surprise me.


When it happens, the algos will be blamed and an investigation will be requested by many market participants who don't understand or want to believe the market went higher based on financial engineering. A fast sell off will end up being a fast realization of the truth as the financial engineering that created the rally (as well as inflation) is now being reversed.


In the mean time, the Fed could pivot before true pricing is realized and the market could move higher once again. It is better to be aware of the risk than to be blind sided.


If you have never traded through a flash crash, the order book dries up and bids and offers are scattered many points away from the last price traded. Limit moves are based on the exchanges 7%, 13%, and 20% rule. Trading is paused at each of those levels for a short period. After a 20% move, the market can stop trading for the day.


I hope it doesn't happen but hope isn't a strategy. Since I don't have a strategy for this type of chop, I am pausing my automated trading systems here until the market conditions are more favorable.

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