There is some controversy in the technical trading community on whether or not the October 2014 selloff in equities officially qualified as a correction, defined as a 10% move from the top. The charting package we use definitely indicated a correction, but like many selloffs in the past few years the market rebounded quickly and with gusto.
There is no such question about this past August’s correction. The S&P 500 dropped roughly 13% in five trading days culminating in a huge move on Aug. 24, a day the Dow Jones Industrial Average opened a 1,000 points lower. And while the markets rebounded sharply on that same day, they were not able to sustain that rebound, proving this move was more substantial.
In fact, what we have seen since has been wild fluctuations in price that may be dampening retail investors’ will and ability to trade the market. “A tale of two corrections” shows some of the key differences in between market action from last October and this August.
“A different ballgame” shows the dramatic increase in volatility during this August’s selloff. Average true range measures the size of the trading range during a given period. The chart shows a massive increase in the range, which undoubtedly led to many traders being stopped out.
Perhaps the greatest illustration of why the more recent correction was, and is, a more serious event is in the CBOE Volatility Index (VIX). Last October the VIX spiked above 30 but quickly receded back below 20 when the market rebounded (see “Spike in fear”). This year VIX spiked to above 50, and while it has receded some as the market rebounded, it remains elevated after spending six months below 20.