The market will always be driven by fear, greed, and hope. Regardless of how long you have been trading or investing, you will battle with these emotions over and over again. The ones who learn how to deal with their emotions are the ones who last in the business.
I always try to take the market for what it is that day and remove emotions and opinions. This gives me the perspective of indifference and objectivity that I need to make decisions with my strategy.
Right now the market has made its stance loud and clear.
Where we are now
We tried to break out into new highs and quickly gave all of that up. There was a bounce when we were underneath the 50-day moving average. Then it ran into a declining 21-day and 10-day moving average. That produced an expectation breaker. Broken support and resistance at those declining moving averages, and we are undercutting recent lows.
The Nasdaq high was 27,722. Right now we are trading at 25,934. We are pretty well off the highs. Not major off, but below some key moving averages. We are still above the 200-day, which is the long-term moving average and most important.
Social media is filled with talks of a bear market and screenshots of big losses. These times are when there is a significant shift in sentiment. The retail crowd gets moved from a state of greed into a state of fear.
The average trader went from planning their Rolex purchase to job hunting. This is the natural order of things.
Serenity (well known trading account) posted a $13 million drawdown in the name of transparency. A lot of people are going viral right now for showing their drawdowns.
Every correction is like this. You have the run-up. You have a continuous cycle of fear, greed, and hope. Stocks moving higher bring an increase in greed. Their bets have paid off. Now they are looking for Lambos.
Then there is this transitional period when the market goes back into correction, where that greed is punished more and more heavily. That is what you see now with these big losses.
The damage is done
If you have sell rules, as everyone should, you are probably heavy in cash. That is most likely the best position to be in as of right now.
The worst thing you can do is try to catch a falling knife. It is a scenario where the odds are simply not in your favor. I have never bought the absolute bottom in a stock in my career. But I have never had to in order to make money.
We should be excited
Market corrections bring much opportunity with them. When the general market goes down, future leaders trade sideways, forming price consolidations and ranges for us to recognize.
Buyers and sellers agree on a range of prices that each stock is worth. These levels are what we call support and resistance. It is our job as traders to recognize these ranges and plan our strategy around them. Using a chart makes these ranges quite easy to see quickly. So we can go through a lot of charts and spot the leaders while they build these bases.
Watch for relative strength
My plan does not change. I will be looking for the stocks with the strongest relative strength, holding up the best in these market headwinds.
Right now it is too early to call which ones are showing relative strength. Money is flowing into defensive names. Procter & Gamble is up over 5%. We need some time for the market to find some sort of stability so we can start to see a clearer picture of where relative strength will be.
Fundamentals are key. The greatest stock market winners make huge price advances after periods of big growth in earnings and sales, so I will be screening and filtering for that criteria. When the market does change trend to the upside, these will be the first to move.
Safety first
Be careful out there. Trade small, if at all, in times of high volatility like this. Wait for market confirmation before putting money to work.
Market confirmation means getting back above key moving averages. Getting back above the 50-day would be a really big positive for the market. If we go much lower and the shorter moving averages get below that 50-day, we can use them as a way of looking for an entry.
We want three days with the low above the 21-day exponential moving average. We want the moving averages in order, so the 10, 21, 50, and 200 all stacked from short to long.
I am trading really small right now. I had one position as small as a 1% position just to see if it works. It is a good way for me to get that dopamine hit of trading without putting money at risk, and also getting the feedback on if my strategy is going to be successful in this environment. It has been a big, clear answer. No.
I will be tracking relative strength and going through these charts in detail over the weekend in our trading plan.