The key to surviving this market

After three strong days of selling, the market took a rest
today. Volatility contracted and range was especially small. The primary trend
is down, yet the market is somewhat oversold by several measures. It is a
high-risk environment and there is nothing wrong with cash until solid
opportunities avail themselves.

One comment made to me by a reader recently was that while I have been bearish
for a while, I have not done any detailed articles on shorting. That’s true. I
may look to discuss shorting techniques in more detail soon, but today I thought
I would talk a bit about the mindset needed to make money selling short in a
bear market environment.

Bear market environments do not act as mirror images of bull market
environments. Turning a graph of a bull market upside down is typically not a
good representation of how a bear market will act. This is because they rule by
different emotions. Bull markets rule by greed. Bear markets with fear.

Fear is more powerful and causes sharper reactions. It is also pervasive. It is
not only what causes the market to trend lower, but it is also the emotion that
rules the rallies. Rallies in bear market environments are especially fierce.
People who are short become afraid of losing all their profits and are forced to
cover as the market begins to bounce. Additionally bottom pickers rush in for
fear of missing the bottom. Many times these rallies are sharp enough to
temporarily take out resistance levels in stocks and indices. This tends to fool
many investors and technicians. To profit in an environment that is susceptible
to such sharp, short-covering rallies, traders need to be willing to shorten
their time frames and take profits more readily.

This applies to short trades as well as long trades. While ideally you would
like to remain short for the bulk of an extended down-move, short-covering
rallies can make it difficult to do. Therefore, taking partial profits at
opportune times can help greatly in being able to stick with a short position.
There are two instances when I will typically look to take some short-side
profits. The first is when there is an especially sharp move in my favor. The
second is when the market is extremely oversold and I believe a short-covering
rally is imminent.

By taking profits along the way, it can take some of the fear out of one’s
trades and make it easier to withstand short-covering rallies and hold on to
one’s remaining short position. The highly volatile and fear-ruled atmosphere
prevalent in a bear market environment make partial profits more important than

Best of luck with your trading,

Rob Hanna

For those who may be looking to expand their
knowledge beyond just market timing, my

Hanna ETF Money Flow System
utilizes the VIX in generating trading
signals for spread trades.

Rob Hanna is the principal of a money
management firm located in Massachusetts. He has spent the last several years
developing and refining methods for trading in stocks across multiple time
frames. He selects stocks using both fundamental and technical criteria, and
then trades them using technical analysis techniques.