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How To Profit In A Market Correction

How To Profit In A Market Correction

Courtesy of David at All About Trends

Last week’s action should not come as any surprise to those who follow us closely. Since the beginning of the month we talked about being overbought, we talked about not chasing the market or stocks, we talked about not reacting when the drive by media was saying WOW the market is up it’s time to buy. We talked about follow the leaders and how for weeks leading stocks were selling off and why that was important as it always forecasts how the rest of the market isn’t far behind. We talked about listening to the market and what it was saying. Now you know why we say what we say all the time. And sure enough here we are!

We even showed you how to use short term support and resistance levels and how they act real time.

Now you know why we hit and ran early in the month and went to cash. We’re up for the month nicely while the market hasn’t gone anywhere since the beginning of October.

 

The chart above shows that of being in the zone for a potential turn higher in the coming days. It’s the quality of that bounce when we get one that we are most concerned with.

 

You can see the lower blue line support level is very near. It would not surprise us to see us open down there on Monday. Why? Because when you go into a weekend like we have, emotional money has the tendency to listen to fear without doing their homework like we are so they hit the sell button on their online accounts to sell at the open at the market. And you know what? All those orders are sitting on the books for when the market makers and specialists come in Monday morning.

They know there are sell orders on the books from the weekend so do you really think they are going to be nice to that emotional money and let them out? Chances are not. This is what’s called trap door opens. It’s where they gap down and fill all that emotional money then run the market without them. We’re not saying this is the way it’s going to be, we’re just saying we’ve seen it before and don’t be surprised if the open is like that.

The reason we are concerned with any bounce in the market is because of the damage that was done to the shorter term frequency charts as shown below. When this sell off started it blew through multiple support levels like a hot knife through butter. This is what happens when the masses are "All In". It’s also what happens when sales increases matter again, err rather lack of sales increases over the last 6-9 months vs. the "Better Than Expected" buzz word we’ve seen during the most recent past earnings seasons this bear market rally.

 

Moving on to the OTC composite

 

You can also see the internal RSI and Full Stochastic levels that got us out of the market a few weeks ago is in the zone for a turn higher. This is going to be very important to watch.

OTC Comp in 60 minute time frequency

 

Green trend channel support isn’t that far away and could easily be touched on the open on Monday. What we want you to key in on is the RSI indicator (Relative Strength) above the chart. Notice the blue circles? See how in November it crossed below the 30 level and how that low also matched the green trend channel support level being touched then came a bounce shortly there after? Fast forward to today’s action, look familiar? Same thing.

In Summary:
There is a good possibility that what we’ve just seen is the first shot across the bow. It’s what happens during all rallies from here on out. We are on the lookout for high quality short sell patterns over the coming weeks and will be spending a lot of time showing you the ropes of those patterns. If you are long only they are a great tool for knowing when to get out. If you are a true opportunist with no allegiance to any one side of the market then they ought to lead the way for profits on the short side of the market vs. the long only buy and hold investor who is still trying to get back to Oct. 2007 levels gives back some of that recature of losses that they’ve enjoyed over the last 10 months.

After all folks its been one heck of a run off the March lows and let’s not forget that the last time the markets went through something like what we’ve been thru the last 2 years (1929), it took 25.3 years to retest those highs. Even after the run we’ve had, the markets haven’t gone anywhere in 10 years.

From This Point Forward All Rallies Are SHORTABLE

Frightened Woman

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Buying In The Face Of Fear

We’ve talked a lot about how we don’t chase stocks — we let them come to us. Sometimes stocks come to us because they march to the beat of their own drum and "it’s a market of stocks and not a stock market." But sometimes stocks come to us because the market is down and 3 out of 4 stocks follow the direction of the market.

When this happens, it can only happen 1 of 2 ways. The first is the market pulls back in light volume to an area of support where most leading stocks do the same. The second is when the market pulls back aggressively and its ability to find support is in question due to the high volume and intensity of the sell-off. It’s often at this time you hear the news media saying the sky is falling, it’s the start of a correction and we’re afraid of this and afraid of that.
 
But often times, this is a great buying opportunity. Why? Because the pullback is more intense and powerful which means there will at some point be an attempt by the market and stocks to bounce back. And given the severity of the pullback, the bounce back can be extreme as well. It’s this extra volatility that allows you to profit and generally profit well.
 
Do we do anything different than we’ve done before when buying? The answer is part yes and part no. The yes part is that we are more interested in doing quick trades — get in, get a few points and get out. That’s because when you have an intense sell-off it’s often the start of a change in trend and we don’t want to be holding stocks long in a market that is changing from an uptrend to a downtrend. All we are looking to do is capitalize on an oversold market and stock’s attempt to make up some lost ground.

This is exactly where we currently find ourselves in the market today.

The no part is that we still buy stocks at support. And one of three things will happen — we’ll either make a profit, break even or sell at a small loss. The difference is that we may have to sweat it out for a few days as the market is more volatile.

To learn more, sign up for our free newsletter at www.allabouttrends.net and receive our free report — "How To Outperform 90% Of Wall Street With Just $500 A Week."

 


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Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

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