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Wednesday, October 31, 2012

Bear market trading

Many get scared just thinking about trading a bear market.  Yes the volatility is higher, but if you harness that volatility the profit potential is huge.  The price action is driven by traders because most investors are sitting on their hands.  Fibonacci levels (especially .618) work much better along with overbought and oversold indicators.  Bear markets can be traded successfully and profitably.  However, one must keep their emotions in check.  If a trader has a 401k or other investments that are getting killed, it becomes much harder to be objective.  The trader will constantly be looking for lows that aren't there.  Every big up day will looked upon as the beginning of the next bull market.  Only to have that hope dashed a few days later.  Great short ops will be missed because the trader will be thinking the market cannot possibly go any lower.  I honestly cannot see how anybody can successfully trade during a bear market if they are losing money hand over fist in their investments.  The emotions can be overpowering.  If you cannot stay calm cool and collected while the market is crashing down then you need to stop trading completely when we get to that stage. This is why I keep asking people to have a plan for their personal finances in the event of another severe bear market.  If you can keep your emotions in check I think I can help you make money.

The early stages of a bear market can be a bit choppy since most people have no idea they are actually in a bear market.  I am not sure how long that will last in this case.  We are already in a recession which generally is not the case.  The sooner more people start recognizing that fact, the sooner the market is going to start going straight down.  I don't have any statistics on this, but I don't think there are many instances of profits and revenues going negative in the same quarter the market makes a high.  Normally the high is made well in advance.  This may speed up the downside acceleration phase.  Lets look at a few prior bear markets.

Here is the 69-70 bear market.

That bear market took out the last major low in 1966 and then V bottomed out of there.

Here is the 73-74 bear market.

Quite the cascade off the top and into the final lows.  This bear market also took out the prior bear market's low then ripped to the upside.

Those charts make the plunge in 2008 look a little less unique don't they.  Here is the 2008 chart for comparison.

Here is a chart covering the 76-77 and 81-82 bear markets since they happened close together.

These two bear markets had much less dramatic down moves.  They were also in the secular bear market period from 1966-1982, but had milder declines.  This has to do with valuation.  The 73-74 bear market took the P/E ratio under ten and it was still in that area during these two bear markets.

I expect this bear market to be of the dramatic decline type.  Valuations are still high and the economy really does suck.  Once people figure out the market can go down even with the FED doing QE it will crash precipitously.  Will you be like a deer in headlights or a flexible trader willing to take advantage of the opportunities as they come along.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.