This is not what an up trending market looks like. Choppiness, uncertainty, leaders getting pummeled, fear running rampant over many, and government interventions to save the economy. As I write this we are looking at possibly 6 straight down days in a row for some indexes. While the $SPY was able to rally back and hold on to the 50 day its brothers $DIA and $QQQ have not been so strong. These are bearish indicators for me.

A down trending market has different trade dynamics than a range bound market or a bull market. You can not just pick leading stocks to go long and believe they are stronger than the market forces or start taking large short positions early, that can lead to being stopped out on a big fake rally.  The loss of the 50 day moving average in the indexes and it not being retaken with strength is a big red flag for the potential beginning of a down trending market and possible evolution into a bear market. Bear markets do not have defined supports they can fall day after day in a downtrend not finding buyers for several days in a row. However you can’t just go take a huge short position either because the majority of down trends start out very choppy with not only bottom fishers and knife catchers stepping in to buy on plunge days but this time around EU rumors or FED action causing face ripping rallies out of nowhere for shorts. This time around the rumors of QE3 are likely already priced in and some new scheme for a European Solution could cause temporary wild swings to the upside and the lack of EU solutions and a statement of no QE3 could cause a plunge for the record books. Even in a calm market it is probable that we will see a few rallies back to the 50 day after its initial loss and it act as resistance and maybe even have a one or two day break above to get people back in before another plunge. Tread carefully here. Many bad elements of price action and macro news about slowing growth make this a treacherous place to be long. Leaders are not leading and today there was some capital migration to utilities and consumer staple stocks. The SPY is the last index ETF holding above the 50 day.

How am I trading this?

  1. I am trading on the short side only until we have a trend reversal and multi-day confirmation above the 50 day moving average.
  2. I am using primarily stock options, to not put excessive amounts of capital at risk of whip saws with surprise news flashes.
  3. I am trading much smaller position sizes than usual with only temporary intra-day leverage above my account size.
  4. I am shorting recent leaders with broken charts that will have trouble recovering in a rally, and have farther to still fall. ($PCLN has been my short since breaking the 50 day).
  5. I  am watching to short recent IPOs that could not live up to their hype and are no longer being rewarded with huge valuations with little profits. ($KORS on the radar)
  6. I am not set in stone on the macro environment I will be ready to reverse and go long when and if we have an amazing rescue and reversal to an uptrend.
  7. Apple is my planned go to long if the world does not end the financial world. I like it with a close above the 10 day sma after the market resumes a uptrend. Or a bounce off the 50 day.
  8. I am not going long in this down trend no matter how much I love any stock  but will continue to watch for strong leaders for my watch list when the market reverses upwards with strength.
  9. My #1 goal is to not  give back my year to date profits from my uptrend winnings in the 1st quarter, I have no interest in being aggressive at these cross  roads.

These cross roads are a time for caution not aggressiveness.