The article on Trading a ‘Bear’ Market last week has played out before our eyes over the last two weeks of trading. The downside accelerated today on worries about the economic picture for Europe an the possible ripple effect back to the US markets. I am not going to refute that Europe is weak, but I would say it is not new news or a revelation about the current conditions. I will go so far as to say the media loves a good story/headline and they need one to attract readers. Put into perspective the sanctions between Russia and Europe. It was all over the headlines the potential impact to Europe as a result of those sanctions. Thus, that is playing out. A stronger US dollar plays against the short term impact of the weaker euro… and that is playing out. All of this has been building over the last three months and now the reality of the projections are settling into the price of stocks. Looking at a chart of Europe and you can see the trend is clearly lower short term (since the June high) and that ripple effect is evident in the charts around Europe. Nothing new, just a good reason for the selling to continue as the sellers exerted pressure to take the indexes lower.
Let’s review, shall we about trading bear market? The lower trending index should be in play for at least ten trading days… check. Short the rallies… Friday the index rallied more than one percent and offered an opportunity to sell into the bounce. Being that it was Friday you could have waited until Monday and shorted at the open as the upside was still in play. Check… Avoid greed and watch how it all plays out. On Tuesday the downside returned and attempting to short the markets into the selling was not an easy process, but we had established our short by selling into the rallies. Owning positions coming into the trading day on Tuesday allowed you to sit back and see how the day unfolded. Set your stops at the risk you are willing to accept and determine what the target is for taking profit off the table and just manage your position as it all plays out. Trading a bear market is different in the psychology of the trade and the management of the trade.
The downside is in play and the key now is to manage the position… not determine if you should take on a short trade at this point in time. I wanted to remind you that this all goes back to what we teach on trend analysis and understanding how to use the trend as your friend. In our webinar tonight we are going to discuss how to make money regardless of market direction. The key to understanding this objective is using trend analysis and the different time horizons to capitalize on the short, intermediate and long term moves that correspond to the trend lines. If you can’t make the webinar you can get a copy of the video on the home page.
The chart below of the S&P 500 index show the break of the intermediate term trend line and the long term trend line just below at 1890 currently. The 200 DMA (Pink) is also in play on the downside if the selling accelerates. Owning the short position currently, the target is the long term trend line for the trade. However, we have to watch the 1910, 1900 and 200 DMA as potential bounce points. Thus we must address how we will trade at each point and determine the difference between a short term and longer term view of the market. As we stated before, short trades are generally short term in nature due to the acceleration in the downside move… they move down faster due to the fear and panic of investors. Thus, we have to manage our trades and risk accordingly.
The move lower on Tuesday was a resumption of what we started last week before the bounce off the lows on Thursday and Friday. Don’t assume anything simply trade your plan and don’t allow your emotions to intervene in the process. Discipline is a habit and the habit of risk management is a priority in the world of trading/investing. Take what the market gives going forward, but respect the trend and understand who and what is driving the movement short term in light of the longer term outlook.