Friday Revisited

Traders suddenly got flashbacks this week to the wild days of the fall of 2008.  In particular, on Thursday and Friday, we had levels of fear that I haven't seen since March 2009.  Quick drops, high VIX, high put/call ratios, bears on TV, and wholesale liquidation.  A key predictor for the reversal to the upside on Friday was the currency market, as the risk currencies were making higher lows as stocks were making lower lows.  That was a signal that the markets were nearing selling exhaustion and a reversal was at hand.

Psychologically, holding above the lows from February and successfully retesting the flash crash lows built up confidence into midday Friday.  But panicky short covering and overeager bargain hunting forced the market to go higher than it was ready to support.  Then you had traders anticipating a trend day higher till the close get nervous as the markets steadily goes lower.  These traders steadily exited after lunch time.  Thus you had the drip drip weakness into the final hour. 

The last 15 minutes of Friday trading seemingly came out of nowhere and to many it seems like manipulation, but I disagree.  Right now, the stock market isn't about fundamentals, but about confidence.  As the gloom started to set in during the drip drip lower move in the afternoon, thoughts of Thursday's nasty close and Black Monday populated the heads of traders.  These thoughts only reinforced the selling, but most of this selling was fast money that targeted a weak close to close out shorts or to rebuy longs cheaper.  A sharp rally higher starting with about 15 minutes left caught a lot of daytraders off guard.  The fear dissipated rapidly and switched to greed on anticipation of the recent pattern of Monday strength.  When fear turns to greed that quickly, you get a moonshot higher.