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Bear Market Here We Come? Don't fight the tape!

By Chris Rowe March 10, 2008 Facebook Logo Twitter Logo Email Logo LinkedIn Logo

The only way to trade successfully is to have the ability to evolve with the market.  The fact is, most individuals lose money in the long run because they are not willing to change their stance and take a loss. Well you have to know - especially in this market - that taking losses is just part of trading.  If you don't know that, then you are playing in a game where you don't know the rules and, what's worse, is you're playing with MONEY.

How can you make money in the ever changing market if you aren't willing to change yourself?

Is there some shame in trading in the wrong direction?  Is there any shame in taking losses?  NO!  There is only shame in having such a big ego that, rather than admitting that the market is moving against you, you decide to stick to your guns.  This is a big mistake. 

I just went from having many bullish positions open at The Trend Rider to having some bullish exposure and some bearish exposure.  I took some small profits in the bullish positions, and I recommended the purchase of put options in stocks that are in some of the weakest sectors and showing negative relative strength verses the market.  I also made sure to focus on NASDAQ stocks for my bearish positions as the NASDAQ has been showing negative relative strength vs the rest of the market. 

Let's look at what happened over the last few trading sessions.

Below, you can see 6-month daily charts of the NYSE, the S&P500, and the NASDAQ.  (Forget about the Dow Jones Industrial Average.  I don't like to use it as a barometer, but that's another story.)

Each of these indices recently broke MAJOR support levels.  This means the selling is certainly not over.  The very best case scenario for the bulls at this point is that the next bottom will be a bear market bottom.  But even if it does become the bear market bottom (whatever the level may be), there will typically be a re-test of that level to form a double bottom, or possibly a triple bottom. 

The pressure doesn't stop there.  What has to happen then is the old support levels you see above must become new resistance levels.  So there will likely be serious selling pressure found once the market eventually moves back up to the levels that we just broke through over the last week.

For this reason you absolutely must have some bearish exposure in this market.  When the market pops higher (near a down trend line which I will discuss in future Tuesday Tycoon Reports), you should consider selling covered calls on your positions.  I will show you how when the time is right.  At the same time, it's more than likely that it will also be a good time to initiate some put positions.  Believe me, you are not late to the bearish party.

Don't get all frantic here.  The market probably won't move straight down.  But don't fight what is currently happening.

For those that have been following what I have been saying about the NYSE Bullish Percent Index, hear this: The NYSE BPI has reversed lower (to a column of O's).  Even though it is in oversold territory, it won't signal that it is time to be bullish again until it reverses higher.  I will keep you posted on the progress of that time tested indicator. 

Until next week.