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I thought there might be a news or something that caused it to drop like 10points in few seconds as it happened blink of an eye. I was just curious why.
This was not a sudden drop. If you look at the chart you will notice ES 03-18 started moving down at 6:11 PM CST. The downmove occured in three legs.
First leg: 7.75 points from 2858.00 to 2850.25 (6:11 PM - 7:22 PM CST)
Second leg: 16.75 points from 2855.00 to 2838.25 (8:49 PM - 9:53 PM CST)
Third leg: 12.50 points from 2843.50 to 2831.00 (10:03 PM - 10:14 PM CST)
When there is a three legged move, it is not unusual that the last leg is building faster than the prior legs. Actually there are two types of tops & bottoms, the round top & bottom (lack of interest by buyers/sellers - thinning out of volume) and the climactic top & bottom. The climatic type is driven by fear. For stocks and stock market indices all bottoms are driven by fear, as the stock market is long only. This translates into climactic moves to the downside, while you will mostly observe gentle tops.
Technically, the fear to lose money translates into narrow stops which are set to protect gains during an adverse overnight move. It is likely that there were quite a few stops below the regular low from January 26 at 2846.50. When these stops were triggered, the market went down to test the regular low from Janaury 25.
Markets are thinner overnight. This means that the impact of stop orders on price is larger than during the regular trading hours. The stops work out similar to an avalanche that runs down the valley until it meets resistance. News are not instantly absorbed by the market, but it takes some time for positive feedback loops to translate them into falling market prices.
Actually, this is an opportunity that can be exploited by a trendfollower. However, you do not want to trade the third leg, but you want to enter the position when the first slow leg is being produced and then exit your position when the market moves fast. The fast move - the climax move - typically precedes a recovery.
If you look at the market on a larger scale, you will notice that the stock market has been overheating, as it has been moving out of its trend channel end of November. This is the beginning of the bonus season where most of the participants in the financial markets agree that they should drive stocks to the upside. I believe that some of the larger actors in the markets have now protected their profits. The first stops have been hit, which sent stocks to the downside.
At this stage - overheated market - it does not matter what news triggers the move. Any news would be good enough, as prices are already inflated. The five minute drop that you observed was nothing special, just a few traders leaving the party before it is over.
the volume was not that heavy for the amount of loss. this may not be over. i dont like the idea of looking for shorts you could get your fingers burned
Because we have been on a ridiculous rally for a long, long time that recently went parabolic and euphoric. See my "this market is stupid" post just a few days before this massive correction.
Eventually someone realizes "why am I buying up here" and it is over...comes down 2-3 times faster than it goes up. Even on a 1 minute chart, it comes down much faster than it goes up. Greed is a motivator, but loss is emotion.
