(Re-)Discovery of This Week: Markets Can and Do Crash Upward

If you ask any long term market participants what a crash is, they will come with a definition quite similar to Wikipedia's — although this definition is very narrow as it refers only to stock markets and won't take into account the crash of a single stock:
A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic as much as by underlying economic factors. They often follow speculative stock market bubbles.
The previous definition might be widened to something like: a sudden dramatic decline of an exchanged traded instrument's price.

And generally speaking, nobody considers there's any chance or probability for markets to "crash" upwards: something like a sudden dramatic rise of an exchanged traded instrument's price.

This fact is so entrenched in the markets that the skew and volatility smile of options always show a wide difference between downside and upside moves.

Well, this week, we saw two very rare events: a melt up of the stock market and of silver, of historical proportions, something like a "reverse crash".

On the chart below: the ES (E-mini S&P futures contract for december) moved from 1,100 to 1,188.5 in 3 trading days and if you look at the RSI chart (red chart below the volume) you'll see how extreme that measure got, far more extreme than during any decline since August.

If such a move would have happened on a decline, people would be crying out "crash" and would be again asking the government and the Fed to come to the rescue...

It was a good selling opportunity, so I liquidated my long ES position at 1,184 and actually went short, but got my stop hit a few hours later, as I got only a few minutes of trading time, had to act quickly and I didn't expect the market to rise above 1,187...

Even more spectacular, was silver, which dropped from $42 to $26 in a few trading days, prior to rebounding from $26 to $32 (a 26% move) in 26 hours. This was one of the most spectacular moves I've ever witnessed:

Unfortunately for me, I was not in front of my computer to act on this one. Anyway, I do not see this as a sustainable rally, and I think we'll see lower lows in the next week or two.


Tiho said...


That is just a short squeeze. There were too many guys doing what you were doing... shorting equities thinking its 2008 all over again! =)

pej said...

I think it was more than a short squeeze, as many were still extremely bullish on the economy, the ability for the Fed and the ECB to save them from their stupid mistakes, etc.