On Jun 28, I gave a short write-up to explain what contrarian trading means, simply put, when you see evidence of the mass retail jumping into the market, it's time for you to "jump out", or even start to go against the masses, by short-selling.
The plunge that follows would need to do a thorough shake-out of this initial batch of novice, to teach them the inevitable lesson of playing the stock market without professional knowledge & experience.
From history, we learned that this down move must be "severe enough" to see not only market plunging, but also investors literally plunging from buildings, and history is repeating itself yet again.
In my recent posts to my students in our FaceBook, I reminded all to look out for a "climax bottom", the way which this shake out would typically ends. Among all the shake-out patterns, I was particularly looking out for a Hammer.
However, China's market FEAR led to PANIC (worsened by authority imposing trading halts to over 1000 counters), and this climax move triggered LIMIT moves to the Index Futures.
08 Jul's closing was down 32.5% from her high, while at the lowest point, 42.6% was wiped out.
In my live trading class yesterday, I told my students that they will not be a "Complete Futures Trader" without understanding LIMIT moves, and what happened yesterday gave me the excellent opportunity to explain this to them.
The story continues like this ... ...
What is LIMIT move?
Go to the contract specs for every Futures product, and you would see this section, describing what it means.
The history of how this was implemented in SGX traced way back to 1987 in SIMEX.
Nikkei closed near 20,000 on an Asia market Monday, and that night's US market was the infamous "BLACK MONDAY" for the Dow. The panic spilled over to Nikkei opening on Tuesday morning, with EXTREME FEAR causing the Nikkei to open gap down at 5,000 !!!!!
Many traders were in deep shit (holding overnight longs) but some closed their eyes and continued buying (OVER-TRADING) at these rock bottom prices.
The Nikkei rebouded more than 10,000 points in 15min, and many millionaires were born just like that (and some died too).
Ever since this incident, the exchange set an "OVER-TRADING" rule, which is a major serious offence, for anyone trading beyond his/her account's margin requirement.
SIMEX implemented another rule to limit any extreme moves, to allow the market to COOL DOWN, whenever she hits the limit price, for 10-15min. After that, market is allowed to trade further, but there is further limit price (called the SECOND LIMIT). When this price is reached, there is another cooling off period of 10-15min.
After 2 cooling off periods, if traders are still "not cooled", then there shall be no further limits.
This measure has been effective in containing fear & panic to markets, and ever since implementing, we do not see any more extreme moves with the kind of magnitude like those of Black Monday.
The previous recent examples of limit reached would be in 2008 Oct, and 2011 Tsunami attack for Nikkei.
CN (A50) on 08 JUL 2015 (Wednesday)
CN closed at 11850 on Tuesday, so 10% down would be 10665.
When China market resumed trading after their lunch, the overwhelming selling pressure took her down steadily to hit 1st LIMIT price at 2:16pm.
When 1st LIMIT is reached, market can continue trading but CANNOT trade lower than limit price of 10665
So minor short covering took place, and market inched up slightly, only to be greeted by more selling pressure mounting from the top.
This dragged on for more than 10 min, by which time 1st limit flood gate is already opened.
At 2:35pm, market retested 10665 and suddenly realized that it can "go through", and she quickly loss a further 400 points.
By 3pm (Singapore time), China cash (stock) market is closed, and it is obviously at the low, with panic at it's peak. Futures market in SGX is still opened, until 4pm.
If you cannot sell stocks any more because it is closed, you can only do it (or hedge) in the Futures market.
By 3:22pm, the selling steadily pushed her down to her 2nd LIMIT price @ 10072.5 (Down 15% from previous day). Trading halt kicks in for a new 10 min.
At 3:32pm, the flood gate for 2nd limit is opened, and a flurry of sell stop orders caused the market to plunge ANOTHER 15% down, hitting a low of 8587.5
It was immediately bought up back to 2nd limit price, showing us a LONG HAMMER TAIL, for any intra-day TimeFrame.
The market settled at 10100 to close this panic day !!!
CN (A50) on 09 JUL 2015 (Thursday)
What happened today ??? (I'm writing this on this exact day)
10% of 10100 is 1010 points.
After the clearly visual super long tail, that is suggesting the possible ultimate shake-out, today's buying forces overwhelmed selling forces, and CN traded very quickly to 10100 + 1010 = 11110, at 10:07am.
Another 5% up would be 11615, and buyers bought her up to this level at 1:17pm, shortly after China market resumes after lunch.
All flood gates are opened and "sky is the limit"
While yesterday's flood gates refer to the downside, today's flood gates are North bound.
As I'm writing this, it's now pass 3pm (Jul 09) so China cash market has just closed (near/at day high this time).
We still have a whole hour to trade the Futures, until 4pm
Yesterday's market opened around YEC (Year End Close) and plunged down. Today's market "rejected" the plunge and was bought back up to close above YEC.
We have a combined candle signal that my sniper trader calls the NT2.
Hope this simple write up explains what LIMIT moves are, especially with a DOWN LIMIT, immediately followed by an UP LIMIT.
With that, you are "one-step-closer" to calling yourself a "Complete Futues Trader", because can now claim to understand, know, and having witnessed not one, but 2 LIMIT moves. Not in one, but both directions, all happened within 2 consecutive days.