NEW YORK (TheStreet) -- On Aug. 24, General Electric (GE) , Home Depot (HD) and JPMorgan Chase (JPM) had flash crash opens that pushed them down by an unreasonable percentage of 21%. Here's what happened and how you can position yourself to profit next time.
Wall Street knew that the U.S. stock market would open significantly lower that day following the continuing crash of the Shanghai Composite in China. However, the New York Stock Exchange was not prepared for the panic-type open that followed what the Chinese called "Black Monday."
Some say that the New York Stock Exchange implemented what's called Rule 48, which allows designated market makers to open the stock market without broadcasting initial bid and ask prices before the opening bell. As a result, many stocks opened much lower that what can be called fair execution prices. At the opening low, the Dow Jones Industrial Average was down 1,089 points or 6.6%, and the S&P 500 was down by 5.3%.
Jim Cramer explained last week's price action on Friday's "Mad Money" on CNBC. The lesson learned is to never enter a market order to buy or sell. The strategy I recommend is to place good-till-canceled limit orders to buy weakness or to sell strength to a set price or range of prices.
I'll show how large the bid-ask spreads were on stocks at the open during last Monday's crash, and how you can avoid getting burned on such large spreads between what sellers are willing to take and buyers are willing to pay.
This five-minute bar chart of the S&P 500 shows the plunge and recovery from Aug. 21 to Aug. 28.
Courtesy of MetaStock Xenith
From the close of 1,970.89 on Friday, Aug. 21, the S&P 500 plunged by 5.3% to as low as 1,867.01 within the first 10 minutes of trading on Monday, Aug. 24. This low was re-tested at the low of Aug. 25.