Wednesday, October 06, 2010

Flash Crash Emini NinjaTrader Indicators

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What Really Caused the Flash Crash?

U.S. CFTC regulators say they've found the cause of May 6's infamous "flash crash." The blame for the near 1000-point drop has been pinned on every possible scapegoat, including the Gulf oil spill, the Greek debt crisis and a so-called fat finger glitch, and now the CFTC says that the automated sale of stock futures without regard to price and “hot potato” trading by computer-driven firms is what briefly created an illusion of liquidity helped trigger the crash, turning an orderly sell-off into an $862 billion rout as buy orders evaporated, but what is the real cause of this enormous anomaly?

That raises the question: Was it really an anomaly? If so, the DJIA price chart should look vastly different from the price chart of another index -- say, Great Britain's FTSE 100 -- shouldn't it?

Flash Crash Chart
When you check out the price action of the DJIA and FTSE, though, you can see that they look almost identical. In fact, the FTSE's three-day, 6% plunge was completed by the time the European indexes closed on May 6 -- just hours before the U.S. flash crash.

So, if the U.S. flash crash is not an anomaly, what's the reason behind the sudden drops in the FTSE and DJIA? Elliott Wave European Financial Forecast editor Brian Whitmer gives this answer in the June 2010 issue:

"There is no reason, because reason does not move markets higher and lower; emotion does. On the way up, nobody questions this fact. Sellers simply evaporate, and markets springboard higher week after week with nary a sideways glance from authorities. The same dynamic is at work on the way down, but now it's the buyers who vanish. And only at this point do regulators deem the market 'irrational.'"

In other words, U.S. regulators aren't likely to find a reason behind the flash crash -- because investors' emotions were the true cause. And who wants that to go into a report?

We aren't government bureaucrats, though, so we can give you the straight information that you need to decide for yourself how to handle your personal finances -- particularly if you are interested in an unconventional point of view about the USA and European markets.

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