We are likely to open sharply lower going by futures as I write this post. The overseas markets were down sharply and unless thing change in next few hours we might have another down open. That should not be a surprise. The market is in down trend. What we saw in last few days was reflex bounce. That got lot of people excited. Sharp bounces are common in bearish phases.
As you can see the market has been going up for last 3 years. It bottomed in March 2009 and since then it went up a lot. This year it was range bound for months. In last week of July the range broke down.
When market suffers this kind of damage , it often takes time for it to recover. Stocks bounced back on low volume after sharp drop but the same stocks are now getting trashed. Many leaders of the rally are breaking their long term trends. When market goes well below its 20 day trend , it usually has sharp rallies of few days which tend to fail. It takes time for market to setup again on long side.
You will see many stocks breaking down after brief bounce:
These kind of breakdowns is not what you see at start of bull markets. At start of bull moves most stocks have put in bottom and building fresh bases.
The volatility needs to come down for market to start building bases from which new advance can start. We have not yet seen signs of that. But from our methodology perspective it is secondary.
The Stockbee Market Monitor will signal buy when the breadth turns and as you can see currently breadth trends are negative.
As discussed in last night long video , this is the time to be defensive if you are momentum trader. This is the time to study past market cycles and historical bottoms and tops. And at the same time perfect your method for next bull move when it develops. Sitting in cash is also a trading strategy. Which many find difficult to implement or understand.
Disciplined trading with very good risk management strategy will keep you in the market for many decades. If you don't respect the market risk you will be out of market soon. If you survive the market down turns with no damage to your equity you will have lot of opportunities to make up the gains and lost time.
There is currently over eagerness to call the bottom and get back in to market. The sentiments are still bullish. Bottom is a process and it will take some time. Being defensive is good strategy for momentum swing traders currently.