Keep drawdowns low to profit from next bull move | stockbee

10/16/2014

Keep drawdowns low to profit from next bull move

A market which is way oversold that refuses to bounce indicates weak market.

Probably a capitulation kind selling with huge breadth will be needed for a tradable bottom. we have not seen any high volume selling so far. If you go back and see Market Monitor down moves often have huge 1000 plus stocks down 4% before a bottom is established. That kind of selling leads to forced liquidation, margin calls and seller exhaustion. From that kind of selling a sustained rally can start. We are not at that level yet as breadth has not been very negative by historical standards. 

Currently we are down only 9% from high.  Which is a correction but may not be sufficient correction for a 5 year bull move. In last 3 years we have not had 10% plus correction . So if we get one it will not be out of character.

And some sort of action by Fed to induce confidence will at some stage may be required but with markets down just 9% it is unlikely to worry them.

Remember every rally since 2009 started with launch of some Fed program like TARP, QE1, QE2 , operation twist and so on. At some stage if market goes down a lot then Fed's hand will be forced. And that could be a signal for bottom.

Bottom is a process and might require time and level. Either way how you handle bear markets depends on how much is your risk tolerance. Barish market tend to be very volatile and most trader who survive the market for decades after experiencing few big ones tend to focus on capital protection during such time. If you do a good job of that and don't have much drawdowns or maintain your capital emotionally it is easier to trade when new bull move starts. Which invariably starts once traders capitulate. 

This is the time to upgrade your trading skills , improve on things you want to improve. Develop setup ideas. Work on market timing . Bear markets give you an ideal opportunity to do that. If you do that you can profit handsomely in next bull move. 

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