Remain in bear market mode

I have heard a lot of chatter from a lot of different traders over the last few
days. The two things I keep hearing are that they are all searching for a
short-term bottom, and they are all confused. Here’s a little secret about mass
confusion…it creates wonderful opportunities. Confusion is mostly brought on by
fear. Oversold measures, which were blown through in May as the market suffered
an incredible two-week sell off, have once again been blown through in the last
few days. This is scary to many traders. They don’t understand why their
indicators aren’t working as promised.

When faced with this the natural reaction of most traders is to stop trading.
Like a deer in the headlights their fear and confusion freezes them. If you’re a
long-bias trend trader, I have no quarrel with taking a little time on the
sideline right now. If you’re a reversal trader, you must continue to trade your
strategy, even if it scares you.

In the past I’ve spoken of the importance of taking the trade regardless of your
market bias. I spoke mostly of this from a trend trading perspective. I’ve
always stressed the importance of having both long and short candidates research
regardless of your opinion of the market. “Keep it simple. Take the trade. If
the market worries you, take a smaller amount or use tighter stops, but take the
trade.” The same advice applies today to reversal trades. Higher volatility
means higher potential reward. Even if you elect to reduce the amount you are
trading with because you’re uncomfortable with the market, the potential rewards
should make reversal trades well worth attempting. Don’t give up.

Now that I’ve finished my sermon, let me tell you what I’m looking for. I think
the market did begin to bounce yesterday. I would anticipate some follow through in
the next day or so which will scare some shorts. As far as levels go, I think
the bounce will get to at least 1245 in the S&P. 1245, which so many were
looking at as support for so long should act as a magnet. After the bounce and
perhaps some sideways jiggling, I believe the market will once again assert its
downtrend. I don’t think this is over by a long-shot. I think the market is in
for a difficult summer. It should remain volatile with a downside slope for a
while longer. As bad as the last month has felt for many, the S&P still hasn’t
even corrected as much as 10%. There’s plenty of room for more downside. I still
believe bear-market mode is the best way to approach this market.

Best of luck with your trading,

Rob