Judging from Twitter posts and comments in the last few days it is evident that the overwhelming majority of traders and even market professionals have not experienced a bear market. That if fine.
Many comments about the drop in E-mini futures after the Iraq attacks, subsequent recovery and references to a unique and unprecedented event confirmed what I suspected long ago: most traders and even some market professionals in Twitter have not been through a bear market. A few points about that before going briefly into some technical details:
There is nothing wrong for not having experienced a bear market. I hope no one ever will but I am sure one will occur at some point, maybe soon.
Most traders do not survive bear markets and they move forward in life. I was lucky and I survived 2008. I was trading equities and ETFs for a hedge fund but my systems and especially my risk management were robust enough. I was also lucky and I traded long a company that was taken over and the profits provided some needed cushion.
Most traders and fund managers active in Twitter nowadays won’t be around after the next bear market unless they sharpen their risk management skills and improve their models and diversification.
Was the move in E-mini futures two days ago unique and unprecedented? Below is a 5-minute chart of the March contract.
Has a sharp drop and recovery into positive territory such as one shown on above chart ever occurred before? Of course, it has! Below is a chart since E-mini inception that shows drops larger than 1.5% and 40 points from previous close with positive close.
There have been 124 intraday corrections larger than 1.5% from previous close to low and with positive close in the E-mini history. Some even occurred recently but notice what happened in the 2008 bear market: a real mess. Shorts would be squeezed all over the place although the market was going down like crazy.
There have also been 16 occasions of a drop of more than 40 points (or $2000 per contract) from previous close to low that ended with positive close. Some even occurred in the last two years and in periods when the contract price was below 1000 (!).
Therefore, it seems that besides lack of experience, there is also lack of analysis from the part of some traders who complained about market manipulation. There was no manipulation; these have been normal moves during times of turmoil.
Charting and backtesting program: Amibroker
Data provider: Norgate Data
Technical and quantitative analysis of major stock indexes and 34 popular ETFs are included in our Weekly Premium Reports. Market signals for position traders are offered by our premium Market Signals service