Equity Collapse

The global equity markets have witnessed a historic crash the past month stemming from the now-ubiquitous liquidity crisis facing the biggest economies in the world. The charts of important index ETFs, including SPDR S&P 500 (SPY) and Powershares Nasdaq-100 (QQQQ), alerted me to the inevitable crash and allowed me to double my trading account's size in its wake.

QQQQ showed a large symmetrical triangle developing since 2007, preparing the tech-laden Nasdaq index for a large break either to the upside or downside. Considering current economic conditions, a significant crash seemed likely and proved true. The triangle's trendlines showed to be very accurate and strong timing tools for profiting off of the sudden downswing.



SPY had been trading in a descending channel and a late September break of the channel's support trendline spelled harsh trouble ahead for the overall market. The S&P is home to several financial stocks, which helped the index ETF plummet during the last few weeks as the global liquidity crisis became increasingly apparent and dangerous.



Energy and commodity stocks were the obvious market leaders of the last two to three years, and their importance became increasingly important in mid to late 2008 as they were singlehandedly holding up the market during bear bounces. Agricultural and fertilizer stocks, such as Potash Corp. of Saskatchewan (POT), Monsanto (MON), Mosaic (MOS), CF Holdings (CF), and Terra Industries (TRA) were among the strongest stocks in the entire market, enjoying ridiculous EPS growth from the energy bubble that began earlier this decade.

Weakness in these ferts, along with in oil & gas, solar, coal, steel, and other energy, alternative energy, and commodity stocks, alerted me of big trouble ahead, as the very stocks preventing the market from spiraling down suddenly seemed among the weakest in the entire market. In late July, POT broke its 50DMA on strong volume, which signaled the beginning of the energy bubble's deflation. POT was then around $200, and went on to break its 100DMA and 200DMA shortly after, eventually hitting $70 less than three months later. Breakdowns at these levels meant large-scale distribution of these stocks by the institutions and funds who provided the buying power that gave these ferts their huge run-ups. The popular oil ETF United States Oil Fund (USO) broke its 50DMA in mid July after a similarly strong run-up in price, and that suggested to me a sharp decline in oil prices was to follow. Other falling commodity stocks, such as United States Steel (X), added confluence to my thesis that the energy bubble was deflating due to demand destruction stemming from the global economic contraction, especially from China, which was originally expected to show massive demand growth for crude.



Without energy and commodity stocks doing well, the market had no leadership remaining and spiraled downward, as the previously leading stocks suffered some of the sharpest price drops seen in the market. At the QQQQ trendline break, I began buying massive amounts of puts in index ETFs, techs, energies, and commodities, and when the bailout talks emerged, it was evident to me that it would be the catalyst for the crash breakdown, which soon followed.