Today was one of those days on wall street where there are violent intraday swings in both directions. The market opened strong, but by 2 pm the Dow was down more than 160 points. Between 2pm eastern and 3:45 the Dow jumped back into positive territory for the day, before sellers rushed back in and the Dow finished down by 57 points. If you just pick up the paper and see the final numbers on today's trading you'll think it was a monotonous minor selloff, but that was far from the case.
Why do these kind of violent intraday swings happen in the market? When do these swings usually take place? How can you profit from this extreme volatility? These are the questions I will attempt to answer in this post.
Many times violent swings in the market occur because of low trading volumes or when there is a large amount of uncertainty regarding the economy. Sometimes, like today, both factors contribute to the violent swings. On a day like today we saw oil futures dropping and stock futures rising through the morning, but as the day went on it seemed as if stocks cared far less about oil prices than normal. Today being the first day back from a holiday weekend the trading volume was very light. The uncertainty regarding the financial markets and their stability couldn't possibly be much stronger than it is right now with all the worries about rising unemployment, inflation, and continuing subprime write offs for the financials.In general these kind of huge intraday market swings occur when we are in a bear market, as we are right now. In fact you will find that some of the largest market swings occurred in the early 2000's for both the Dow and the Nasdaq as the dot com bubble was bursting. The general rule is that stocks are more volatile when the bear is in control and more settled when the bull is in control.
Profiting from this type of market action is far more tricky than many like to think that it is. Huge intraday swings are tough to predict and can hurt short-term traders just as much as it helps them sometimes. I like to profit from huge swings by looking for capitulation in the markets and finding top-notch names that are selling for a discount.
The bad news is violent swings usually occur in a bear market. The good news is these violent swings generally mean the bottom is coming sooner rather than later.
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