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Was Flash Crash Legitimate?

Wednesday, 19 May 2010 | 1:38 PM ET

As the market continues to break through key technical levels, traders are asking themselves a difficult question: Was the so-called Flash Crash legitimate, signaling a coming fundamental deterioration in the global economy or still just a computer glitch?

At its low today, the Dow Jones Industrial Average would wipe out the comeback since that infamous sell-off three weeks ago, finishing below the close on that volatile day. It is still more than 500 points from the intraday low marked during the height of the panic on May 6, where the Dow lost as much as 998 points in a matter of minutes, but traders are starting to think it is headed back to that level.

“With the continued technical breakdown today, traders are really waiting for a retest of that May 6th intraday low,” said Joe Terranova, chief market strategist for Virtus Investment Partners and a ‘Fast Money’ panelist. “Traders have an old saying ‘If you get the print there, that’s where it’s headed.’”

Terranova and other traders cited the S&P 500’s move below its 200-day moving average today as a key technical breakdown that could lead to more selling. The S&P 500 hit an intraday low of 1065.79 on May 6, about a 4 percent drop from here.

Traders have questioned the validity of the low levels marked by the major indexes during the Flash Crash because many trades were an obscene 60 percent off the market and eventually busted by the exchanges. This has sparked debate among technical analysts, who look for past lows and highs to determine future price movements.

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“Sure the market was down all day, and a correction was overdue, but 650 points in less than 10 minutes?” wrote John Roque, managing director at WJB Capital Group, in a note to clients after the sell-off. “That’s not a correction, that’s a joke.”

But after a 500-point drop in five days on the Dow, traders aren’t laughing. In a report yesterday, the SEC said it still hadn’t discovered a single event that caused the drop and that it “found no evidence that these events were triggered by ‘fat finger’ errors, computer hacking, or terrorist activity, although we cannot completely rule out these possibilities.”

“The ‘Flash-Crash’ will prove to have been no flash in the pan, and the recent dip should serve as a warning, as to how fragile and thin our markets truly are,” said John Tabacco, founder of LocateStock.com, a service for short-sellers. “The warnings are there, in fact they are everywhere, but pundits keep coating it in sugar by categorizing the worst of news as the new normal.”

For the best market insight, catch 'Fast Money' each night at 5pm ET on CNBC.

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