Is there any way you can remain completely safe from taking losses in the market? No, but you can sure pare down the odds and make it a lot more in your favor. Likewise, it's foolish to think you cannot make money in literally any market environment. If you look for leadership, good chart patterns and time your entries well, even in a raging bear market you can still go long with success.
Obviously that is "fighting the tape" right? Absolutely. It would be more profitable to be short during a down market time frame and easier to do too. We have many readers that simply won't go short or buy "put" options. So we try to show that if you are careful and do your homework, you can go long in a bear market. But fighting the tape is the wrong way to go. So, for the first installment of our mini series, let's look at the tape, and where it comes from.
First we have to be aware of the overall market "trend" and we want to take a moment to clear up just what a trend really is. Remember a few up days is not a bull market any more than a few down days signals a crash. Markets go up, markets go down. Our main priority is to try and figure out which way they are going for the longer term, not just tomorrow. There is an "overall trend" like the downward one we have seen in the NASDAQ for over a year, and then inside that overall trend there are smaller "mini" trends. For instance, the lows hit on April 4th, 2001 to about June 5th, 2001 were a "mini" uptrend. The NADAQ gained something like 40%.
Let's suppose we are looking at a scenario like this: We are in warnings season and the market is really nasty. Volatility reigns, and we are trading sideways to down. Then finally the warnings start drying up, and they focus more on perceived "good news" and the market starts moving up again, into the actual earnings season. Then after earnings the market settles back and drifts lower. Now, its mid-August and we are at the same levels on the averages we had when we started. What was the trend? See, there really was no "overall market trend". We were basically directionless and getting tossed around on news, hopes, fears, anticipation etc. Yet during those periods of upswings and downswings, there were "mini" trends forming.
It's those mini trends that produce profit or losses for you the investor or the short term trader. Get on the wrong side of that mini trend when the market is falling and you will be trapped in losing positions that could get really costly. Likewise going short when the mini trend is "up" can add some gray hair to your head quickly. So naturally, correctly identifying the mini trend is the first step in playing safely. If the trend over the short term has every appearance of being "down" then you don't want to be loading your boat with longs. Sure you can still pick off the leaders and the breakouts, but you will have to be very fast and very stock specific. None of this "buy em all up" mentality.
On the other hand if the mini trend is up, you don't want to be holding a ton of shorts, or missing the boat by only having one stock in your basket. Both are costly mistakes. So again, job one in playing safe, is always going to be to try and place yourself on the correct side of the tape. Long in a bull mini trend, short in a bear mini trend. Remember the old adage, "only salmon swim upstream, but then they die". Likewise fighting against the tape is a tough way to go. So how do we find and identify these little trends? Well certainly our job is to try and weed them out for you, but you too should be doing your own homework. What we use is support/ resistance lines, overall "mood" of the market, and significant changes such as rate cuts, earnings seasons, etc., all of them lead towards the formation of mini trends.
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