Here Comes The Bounce - By Joe Duarte
Those who can closely monitor trading positions may get a chance to trade the long side, as a vastly oversold market looks ready to bounce on Wednesday.
Bear market rallies tend to be swift and treachearous. And until proven otherwise, any bounce in this market is just that, a bear market rally. That being said, it's important to be able to take those opportunities to trade the long side when they present themselves.
The major reason for any rally at this point is purely technical. Simply stated, the market has run out of sellers, and it's time for the buyers to come back. But since there have been so many disappointments and fakeouts in this market, as prices bounce, those who bought, saw their purchases go south, and held on, will be looking to get out as the market rises. That means that at some point, even a significant bounce of 10-20% or more, will eventually roll over as the sellers gang up on the buyers.
That means that anyone who goes long in the next day or so will have to be very vigilant of any new positions and will have to follow a few simple rules.
First, it's important to keep position sizes small. A few hundred shares may be enough just to test the waters.
Decide how much you're going to lose before you buy. We like to keep our losses between 5 and 8% at most and that's where we set our sell stops.
Set your sell stops up early and continue to ratchet them up as your positions rise in value.
Know your support and resistance levels cold. For example, in this market, the 700-740 area on the S & P 500 (SPX, below) are the first line of resistance. That's where the sellers will be lurking.
Be flexible. If the market takes out resistance levels, consider adding to your positions. But keep the number of shares small, and continue to use sell stops.
Use ETFs at this stage and keep it simple. The S & P 500 SPDR ETF (NYSE: SPY) is an excellent vehicle for the current market.
And don't get too caught up in the hype. At this point in the cycle, it's all about the charts, and the response of the market to the news.
Conclusion
A trading bottom looks to be setting up. It may be a short term opportunity, or it may be the end of the bear market. No one knows that, and no one will know that for at least several days, or perhaps several weeks or months.
That's not our concern right now. Our primary focus is that the market looks set to stop falling and that the short term direction seems to be up.
This rally, if indeed the early indications are correct, could succeed, or it could fail. Our goal is to manage the situation by using sound trading principles, and above all things, to protect our trading stake.
Visit our S & P 500 timing section for more details about entry and exit points. If the rally does indeed materialize, we will begin to add some individual stock picks in the next few days.
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