2015 Flash Crash vs. 2010 Flash Crash

I mentioned in an article published yesterday that if a Follow-Through Day (FTD) occurred in the near time frame that it would likely not lead to a meaningful rally. My reason for stating this is that quick market dumps damage charts that takes time to heal. Since some pundits are calling the recent market action a "flash crash" I decided to go back and look at the 2010 flash crash for a comparison. In the chart below I show the May 2010 flash crash and the chart action after this date. I depict four rally attempts with RD (Rally Day, day 1 of a possible advance) and FTD (Follow-Through Day, date of confirmed rally). Note that the first three rally attempts failed and it wasn't until September 1, 2010 that a trade-able rally occurred. The flash crash was May 6, 2010, thus it took approximately four months for the damage to be repaired.

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The equivalent market cooling off period in the current time frame would suggest late December. I show the current NASDAQ chart for comparison to the early days of the 2010 flash crash. 2010 was early in a new bull market advance, just a little over one year. Today we are more than 6 years since the 2009 market bottom and thus I would expect the market to do something different than what occurred in 2010. Perhaps we are in a bear market today and don't have the hindsight perspective to make this declaration yet. I note the juxtaposition of the 50 and 200 day moving averages in the two time frames. The recent flash crash immediately sliced the 200-day moving average from a position below the 50-day moving average. This appears to be a weaker structure than what occurred in May 2010.

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In my studies of bull and bear markets there is a clear difference in price volatility. The largest up and down days occur in bear markets. The largest NASDAQ up day in history (close to close) occurred on January 3, 2001. On this day the NASDAQ index closed up 14.2%. That is a massive move for an index. The market didn't bottom until October 2002. So my caution is to take note of large price swings and remember that markets advance on low volatility and high volatility suggest lower prices ahead.

Since we live in a time of central bank interference it has become really difficult to read the market tea leaves. Every gloom and doom call of market practitioners has been met by the market making new highs. Is this time different?