This Market is Tough To Buy

Since the "flash crash" on May 6, the market has had a difficult time gaining any traction. Its first rebound from that fall was a fairly obvious dead cat bounce, which I shorted as it approached the 50 day moving average. Sure enough, it fell after that and I covered pretty quickly.

My mind-set has been fairly negative since. I just haven't been able to accept that the market can climb back into the saddle and head for new highs after that terrible down day May 6. I continue to keep this mentality until the market shows otherwise - that's trading.

Consequently, I bought the market (options in SPY are my favorite vehicles of late) on June 8 after an upside reversal. While the market finished down the next day, it continued higher after that, and I promptly sold my positions. When the market is having a difficult time, it moves fast in both directions, so taking reasonable gains fairly quickly is prudent.

My strategy has been to let the market rally back up to the 50 day moving average or resistance level close to that area and then turnaround and short again. Because I was trading the SPY, I never kissed the 50 day. If I had traded NASDAQ or DOW vehicles I might have had a chance to get in.

I really thought the market might have rallied more than it did recently and didn't expect to truck to new recent lows quite like it has. Sticking to the plan and not just diving in wrecklessly is the best way to grow and preserve cash.

I wish I was in this week's downtrend as I have not felt the market is ready for a full blown rally at this point, but because I let it play out (i.e., look for rally to resistance level that never happened), I stayed out and made some money along the way.
What now? If you don't have a position in the market itself, the indexes, it's a good idea to not get in to one until we have some clarity on a short term direction. The market seems to be saying it will play at these lows or go lower, but it isn't offering a reasonably entry, from my perspective, at this point. A rally to certain levels would, and I'll revisit this in the near future (maybe I'll do some posts while on vacation in Laughlin/Lake Havasu nexxt week).

As far as IBD style break out stocks go, hold your fire. If you have any positions that are not currently profitable, get out. If you have profit in any stock, only hang on if you feel very strongly that it will hang tough and stay profitable as the market works out a new near term bottom. However, I'd be inclined to be out of all break out positions right now and just let the market do its thing.

There will be some good swing trades in the near term that aren't IBD style break outs that I'll look at. Gold seems to be hanging on and wanting to go higher. I still have positions in that as well as silver. One could argue that silver is etching out a cup with handle while gold is already in a steady uptrend after breaking out from a cup with handle.  I'm keeping a watchful eye on both, especially since I felt silver had cleared resistance recently (see one of the posts below) and was ready to go higher, only to see it revisit this resistance level.

One quick thought - if you are good at short selling, it's possible we start seeing some IBD style shorts set up. These are tricky, and I confess I haven't mastered the art of shorting stocks using Bill O'Niel's approach, as laid out in "How to Make Money Selling Stocks Short". It's a good read, but finding short candidates is challenging that meet O'Niel's critearia.

Essentially, stocks he likes to short in the book set up in head and shoulder patterns. The shorting opportunities come when the stock rallies back above the 50 day moving average on try 2 or later and then falls back down through teh 50 day, preferably on volume (after creating the left shoulder and head and rebounding from a fall from the head, and carving out the right shoulder). There are a lot of details to this approach, but if we are in for a sustained downtrend, start looking for shorts.