Why did the DOW ($INDU) Stock Market drop more than 500+ points today? August 4, 2011

Why did the stock market drop more than 500 points today & will it ever bounce back again ? 

I’m sure this will be a major question tonight

For traders, who have been at this for years , we’ve seen market corrections, flash crashes,  pullbacks, recessions etc.  Its tough for new traders to come to grips or even survive these slight downturns.  I say slight since many bigger further drops have been 20%-30% Can you survive that?

So what happened to cause the DOW ($INDU) to drop of 513 points today?

1) Debt Ceiling – although been raised still won’t be resolved till November & then will be due again in 2013

2) Problems in Europe ( Italy , Greece – the PiiGS with two eyes “i'”s – stands for Portugal , Italy , Ireland, Greece & Spain)

3) Ongoing problems with Unemployment

4) Real Estate not recovering

5) It was  Japan, no its the Swiss Franc

6) Its all Bernanke’s Fault

7) it was all the politicians fault

8 ) it was Panic Selling

9) People aren’t Spending

10) It was all about Inflation & the price of Gasoline

11) it was all my dog’s fault ( well don’t blame the poor dog )

You can watch CNBC or read articles &  the experts will tell you why this happened but they rarely all agree on the exact details.

as a trader its not really important to understand all the details since it could be all or a combination of the above or even other factors. But the main goal of a trader should be when these drops occur to

a) keep calm (don’t panic)

b) Money Management

c) Look for opportunities from this correction or drop

d) Understand that it will happen again so you can plan what ” you will do to protect yourself next time”.

e) Do you have any money to rebuy any further drops from here?

(if you can’t do all of the above then you will never succeed at trading)

 

Some of the posts I read today on twitter reminded how many times I’ve read the same thing in past market drops/corrections prior to twitter ( on message boards, newspapers or talking to other traders)

like the following messages: sometimes they are jokes but some people are actually hurting badly with this drop & you can see from the posts that they were lacking something ( what is that something? when you find that it will be much easier trading for you).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Then you see some more experienced traders & the tweets today had a different feel or what they had learned over the years to help them succeed at trading & some are still learning ( but different type of tweets from above)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What could a trader do to survive or  protect themselves from these market drops?

I posted on twitter earlier tonight some comments that you can see below but prior to this week many traders (that got hurt) did not have a Trading Plan  or money management skills, they had no hedge, they didn’t park any profits leading up to today’s drop — You need to start with a Set of Specific Rules that will help you  succeed at trading long term, but more importantly survive market drops like today. So if you didn’t handle today well , you will have a much tougher time since this will happen again and again. Not often but it will.

Where will we bottom? Some will watch employment #’ , US $ etc. etc.  I like to watch the charts ( I had some great signals in 2009 that helped me become more aggressive after the 2008 market drop )  I used similar analysis buying after the 9/11 Terrorist Attacks in NY City. Different circumstances , different scenarios but some of the same factors like panic selling an extreme drops like we saw today. 9/11 was more of a gap down since they closed the markets that day.

Here are the Tweets I had posted earlier tonight

 

 

How did I do today? I actually did not do well today  – My swing trades were down . I did have a ZSL position ( which is a short on silver which recovered alot for me ) & did have a hedge by owning SQQQ which were both up nicely —

ZSL was up 14.48% & recovered $8,010 for me & SQQQ was up 13.58% & recovered $17,014.62 for me. Not fantastic since still down on other swing positions today.

What i’m happier with was the $102,502 I took in profits in June & July ( one of my best 2 month run this year) & that I didn’t overbuy into the Debt Ceiling Crisis – with exception of some key buys I kept mostly in cash & didn’t rebuy GOOG AAPL MGM PCX RENN YOKU SINA & other positions I sold in June July –I’ll do a more detailed blog with the % & what stocks I actually sold in June/July this weekend –

My happiest moment today ( & yes there was … )  was to hear from 2 traders in the chatroom & how well they did today

1) one trader made $50k profit ( one of his biggest days ever )

2)Another  trader made almost $9k profit

Both traders I know well & they’ve listened to me talk about all the trading rules that have helped me over that years. So I wanted to spend a bit of time and give you more information that I think will help you.  On such a bad day like today how could some traders have done so well?  Well they both had used shorting futures as part of their strategy today. If you talk to them they both feel as though they had done nothing special than they do everyday. I’ve seen how they both trade and regardless of the price they still trade the same. Today was much easier since we had such a major drop but they already had a strategy.

I know they didn’t get lucky. Why ? because they already had set rules and Trading plans prior to today. The 2nd trader already had done well in the past. Both traders have learned a lot from me & from the other traders in the group. So I wanted to go over what I feel they both have in common & what sets them apart from the average trader.

1) they both have no egos

2) they both have trading plans

3) they are very mechanical in their trading & emotion plays a minor factor for them

4) they’ve been or listened to most of the webinars we have on the site

5) they are constantly learning different techniques outside of the group & from probing other traders in the group for opinions

6) they are very disciplined

7) they are very dedicated ( 1 paper traded for almost 1 year – the other had many setups starting out )

8) they don’t copy trades but develop their own little system

9) They both hate Fridays ( they don’t say TGIF but say TFIM (ThankGod its Monday) or TGIS ( Sunday if they trade futures)

10) They both are very family oriented

11) They both have a great sense of humor which helps deal with the many ups/downs of trading

12) Not surprisingly , today both knew they could have made more money  ( not thought)

13) They were both due for nice profits today since they both worked so hard & have bounced techniques with each other

14) When they do try a new technique they have done it without risking a lot of capital

15) Continously Learning

16) They both understand the Fear & Greed of the Stock Market

17) they are focused on what they are doing

I can keep going on and on — but its getting late

 

I wanted to post this blog since I want traders to understand that there are successes on days like today. But I’ve seen this before & this is what we will see tonight we’ll hear Leno/Conan/Letterman say jokes about today’s market drop & then we’ll see tomorrow’s newspaper with the “Worst Market drop since…. How Far will it go? & they’ll post that picture of a “dejected trader. & CNBC who will have all the experts tomorrow saying “We told you there would be a major drop ” & if we bounce then they’ll have the experts saying ” We told you we were oversold & we’d bounce”   That will only confuse you.

From here : Try to learn from more experienced traders. If you want to do it the longer way , then do it on your own & you’ll get there too if you are dedicated, but you MUST MUST take trading seriously & learn.  Some on twitter , may think that I’m the smartest trader in our chatroom or I make the most money in there. Far from it, we have some traders that have done much better and are much smarter than I.

I’m good at what I do but I feel so lucky that if I don’t understand something that I have so many sharp people in the chatroom that I can bounce ideas off whether its an options question or strategy, an oil question,a silver chart i don’t understand, a futures question/strategy, a charting strategy, a certain sector, or someone to tell me stay away from 3x decaying ETFs..  etc.

Prior to the Debt Ceiling Announcement I had a plan . A trader on twitter asked me what I was doing into the DebtCeiling Vote: Here is the twitter chat from July 28th , 2011. I had also gone over market charts & similar thoughts in past webinars & in the chatroom each week.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

You can join us in the chatroom daily or come to one of our many webinars. The group is here for you to learn. We try to put as much free info & webinars as possible.  If you need personal 1 on 1 mentoring I’m available but its something i’ve limited to Premium members only since I have a family & other business obligations so its not always possible to meet with other traders. If I miss your email or tweet its that I’m very busy. I’m trading, teaching & keeping the wife happy so understand I have some limits.. lol

 

Sorry if any typos, but was late & if any mistakes or if i add to this I’ll edit & repost link on twitter

Happy 500+ Market Drop Day – Aug 4, 2011

 

 

 

 

 

 

Posted in Commentary