HOW TO TRADE THE MARKET’S NEXT BOUNCE

HOW TO TRADE THE MARKET’S NEXT BOUNCE

The key to success in today’s market is having a game plan and sticking to it. And we hate to sound like a broken record, but you’ve heard us say repeatedly, the game plan for success today is:

"Buy trend channel support and sell trend channel resistance." OR "Buy the dips and sell the rips."

In our article last week, we said:

"As we’ve been saying the last few weeks, it’s all about buying trend channel support and selling trend channel resistance.

A pullback to trend channel support may be just what’s needed to get a running start. Should that occur then we want to be buyers of stocks that fit a similar pattern that trade in tandem with the market."

And that is exactly what we did Wednesday when the market came crashing down to support. We covered our shorts that needed covering and went long when we saw issues approaching trend channel support.

Last week we heard everyone saying you have got to buy which is a classic herd mentality after we’ve already run. But the fact is, despite Friday’s sell-off, the uptrend remains intact and we simply followed the plan we laid out for you last weekend — that being ride our shorts down to support in the charts of the indexes, cover them there and look to buy stocks that are at support.

THIS WEEK’S GAME PLAN

Last week, the market was at resistance, so the game plan was to stay in our existing short-sell positions until the market hit support where we would cover and go long on stocks that were also at support. And this week, the game plan is exactly the opposite. Why’s that? Because the market is right at support — yes, it’s only been 5 trading sessions and that’s all it took to take the market from resistance to support.

So as long as support holds, the game plan for this week is to stay in our existing long positions as the market attempts to stage a snap back rally. When that occurs, we’ll take our profits on the long side and look to go short again as the rally set-ups stocks on the short side.

We don’t make up the game plans though — all we are doing is simply reacting to what the market is telling us and trading what we see. And here’s what we see:

As you can see from all these index charts off the April lows these big picture uptrends are still intact and oversold at these levels. That doesn’t mean that they can’t go lower here, it just means that these are levels that ought to act as floors below. What we want to make note of is the pink bearish channels back in June and July, see them? We bring this up as it’s what we want to be on the lookout for with any rally from this point forward.

To give you an example of what we’re talking about with regards to what a snapback rally ought to look like, below is a good example.

In Summary: The name of the game for next week is watch for a snapback rally or dead cat bounce. When all said and done it ought to look like some sort of bearish channel then we take profits on all long positions and start shorting.