More Erosion
Regulars to
this space
know that I eschew specific
forecasts as to market direction.
Intellectually, it’s fun to try to
predict where the Fed is going to move funds, when a market correction will end,
etc.
But as a trader, you don’t make money
by forecasting when a correction will end.
You make money by acting on what you
see in the market.
At this point, however, what is
known is that the growth sector looks like late March, needs plenty of
rebuilding, and presents practically zero opportunity for the intermediate
trader that likes to buy stocks coming out of sound bases.
As mentioned recently, the kind of
damage done to the vogue names that are the focus of this space will take weeks,
if not more, to correct.
If you’re sitting in a 100% cash
position, stay there.
Although I rarely sell short, I must
say that the short side looks way better
than the long side at this juncture.
However, shorting is much more
difficult than going long.
The reason is that of the two emotions
that dominate investment decisions, greed and fear, the latter is much more
extreme in human beings.
Translated to the stock market, this
means that stocks go down much faster than they go up.
In turn, this means that your timing
on entering a short position necessarily must be much more precise.
And even a perfect entry does not
preclude a furious short-covering rally, which can send a stock blowing past
your entry point, wiping out what profit you may have in no time.
A word to the wise: If you’re going to
try shorting for the first time, do it on paper first to see if your strategy
works before committing your precious capital.Â
Otherwise, I would be very careful
about getting excited over one-day bounces in stocks, such as we saw Monday.
If you’re holding a stock that was a
leader in the growth sector, and for some reason didn’t sell it on its first big
break over the past one to two weeks, you might want to consider selling on a
low-volume, “wedging rally.”
In your general market analysis,
volume is always important when watching the big averages.
At this point, you should be on the
lookout for wedging action in both the Nasdaq and leading stocks, whereby an
average or stock angles higher after a sell-off, but on shrinking volume.
The recent Nasdaq bear market is a
good example of what I mean:
With the above in mind, volume can be
quite valuable in determining whether a snapback rally in a stock has staying
power.
This is one reason why the O’Neil
follow-through day (please see the Intermediate-Term
Trading Course that I wrote with Greg Kuhn for an explanation) has value: it
shows a certain level of conviction following a sell-off in a big average.