Oct 13, 2014 – The Significance of a 3% Down Day

October 13, 2014 is a significant day in the realm of quantitative financial data because there have only been 257 occurrences of a 3% down day in the past 28 years since 1987 or a sample size of 6,881 trading days. More so, today’s 2.78% drop ranks as the 245th worst day in history of PSEI since 1987. Let’s crunch the numbers. According to data, we actually have the least volatile in terms of years to have negative 3% drops (There’s only 2 in recent year of 2014, one when we hit the retest of our bottom of 5880 last February 4,2014. Note too that during 1993 and 2009 which were continuations and starts of great bull runs, there have been these volatile bumps so just because we have -2 or -3% days doesn’t mean the bull market is over. Note too that when these volatility breakouts of-2% to-3% in the index rise above 10 could we only define that we are in a bear market at least based on the characterization of bear markets in our history. In other words, this is just a draw down that hasn’t reached “bear market” proportions. (At least not just yet). We also note that these 3% index down days only comes 3.73 times in a given year, so we are still below average (or rather we may expect 2 more possible 3% index drops to cap our year just to revert to the mean.) We also have less volatile index fluctuations nowadays despite the advent of day traders as can be evidenced by 166 occurrences from 1987-2000 versus 2001-2014 which had 91 occurrences despite having the same 14 year time span.

volatility up

What we do know is the volatility rising is often a signal of a turn for reversal.  It is a signal to go down (if we are on an uptrend) and up (if we are on a downtrend) which is why everybody’s getting scared since 2.78% drop may just be the beginning of further drops as evidenced during 2013.

Volatility is a warning sign of Possible Reversals

volatility is a warning sign

To answer the question whether after a 3% drop is followed by rebounds, we get mixed answers.

During 2013 – it was a premonition for worse things to come.  The first 2% knife cut in the index was May 27, 2013 which sent index to break 7200 as well and closes 7,089.  We all know how that turned out.  (pretty bad) and at the same time, we find 2% drops characteristic as well of short term bottoms as evidenced when Dec 10-Dec 12 showed multiple retests.  (I.E. If we are facing a reversal or a bottom, we would usually have a lot of retests, just as June 20-June 21 showed retests on the initial 6300 levels)  This 6300 level was also revisited July and then September.  Hence, if 7000 is gonna be support or resistance, we’ll have to be retesting it pretty soon (either as confirmation of utmost strong resistance, or temporary short term support.) Based on foreign flows selling though, we’d have to bet that 7000 is now a possible strong resistance. Piercing through it gives the bears another lead which is why the closing of 6,968 gives more momentum to the downside and any relief rally are merely relief rallies.


#PSEI tumbles and goes sideways to find a new base.  This will be characterized with large caps finding bottoms.  Possible clues are #AC finding support either at 650 or 630 levels.  (Maximum retrace at 600) as well as #TEL to find support at 2900-2800 levels (if correction proves strong and deep.)

psei tumbles and goes sideways for a new base

2014 showed that volatility is a bottom indicator but also a possible top indicator.  Therefore, the damage done by the index will not be corrected with dead cat bounces but with solidified strong bases.  This can usually take months, not days to fix.


data shows more sell offs likely

We don’t want to scare you but data shows more sell-offs likely making 7000 your strong resistance (and any rally above it as a strong selling zone.)  Usually, when volatility spikes this much, you have a strong distribution and that usually takes weeks (not days) to fix.  The earliest for damages like these to get fixed takes at least a month.  There are some exceptions.  Year 2007, 2003- 2004,1999,1994-1996,1988-1992 had several 2% to 3% index drops and consequently trekked higher perhaps mainly because the general trend was still up. 2008 revealed its bear market character. 2009 had little volatility. 2010 showed consolidation taking three months.  2011 was fairly quick and the damage was fixed within one month. 2012 also was quick fixing the problem with just a month’s consolidation. 2013 was harder to fix, but it was still fixed after 6 months.

No matter how bullish I am with our market fundamentals, we cannot deny that the data favors the bears in the short term but the general trend (judging with 1994-1996 bull markets and 1988-1992 as well as 2003-2004) only shows us that the setup for the final bear will happen 2015-2016 * you possibly have one year to continue distributing before leaving the market entirely.  The most we can do in these negative days is to sleep, make sure we have a lot of cash and we must wait for significantly oversold companies with good fundamentals to weather the consolidation.  We are lucky that volatility has only risen just now.  Until volatility spikes consecutively (which happened in 2012 – but resulted in consolidation), we will know what kind of character our correction is, I’m sorry if I wasn’t able to really explain much of the current scenario of our market.  What I do know is you might have to prepare for large possible draw downs because data suggests we are not yet out of the woods and that index drop is only a premonition of possible hard times ahead.  This only means that if despite 2-3% index drops, if we can stay afloat above 6800-7200 in the next 2-3 months, then we will really have a final distribution topping pattern come 2015-2016 just in time for our favorite elections.

– Faceless Trader

All opinions mine alone.


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