How many people people where watching carefully a few weeks ago when the 1000 point DOW drop came ? How many where expecting it. Apparently some where.
I like making up charts, I like using Fibs and different kinds of trend lines, because they work, the connections you find in the market are uncanny, its almost spooky sometimes. I am not sure if its trader behavior, computer algorithms, or it just 'the way it is' due to the laws of nature.
So take a look at this chart. In it, it shows the day of the 1000 point DOW crash, Its the SPY as I don't have the ES back to the lows of last year that are required to draw the median trend line.
The median trendline, in this case, is made up from the low of the last year, the high of the last year and the previous swing long before that high. So these lines where drawn along time before "the crash". The upper and lower parallel are drawn from way back at the high and low price points.
So, you can see price hit the top parallel trend line a few times, each time being rejected. That's normal, price tends to revert much more than it breakout, but then came the Euro crisis and this is when it headed to the middle line, the median. So guess what happens, it bounces a few times on the long running median line, and then it goes through and there is a massive sell off. It is obvious that this median line is very well respected by the market and once price dropped under that line (after a small battle on it), it was panic selling, because the next stop is the bottom parallel, which is a long way down. Since the market has rallied so hard over the last year, the point difference between the lines is large ... the bigger the rally the harder the fall.
There was no 'dumb thumbs' trader error or computer error. It was a break of the median line, for the first time for some time, in an overbought market, with negative news and future uncertainty, that created the big sell off. You can see price dropped through it, out the bottom parallel and then closed just back inside the lower parallel.
Next it retraced to the median again.
While I am sure almost no one expected it to go 1000 points so quickly, there was an obvious cliff there.