Correction time

The correction which sarted last week is going on. Corrections are normal in markets which had gone up a lot witout pause. Yesterday for the first time we saw some serious selling. How long and how far will the correction last, I do not know. But my studies show selling is generally concentrated in bursts. After the burst is over, the market stabilises, rallies a bit and if there is more downside then it will be followed by another burst of selling.

While many sell off look scary, it is infact time to look at good earnings play, if they have legs, they will just keep hanging on to their gains or have very orderly pullbacks. Some might even start attracting buying. I added couple of earning plays yesterday. The resilient ones are the one to keep an eye on, any hint of market stabilising and they will quickly burst out of their ranges or pullback and move rapidly.

The momentm plays also work similarly . Look at stocks like AKAM, AMIE, OMG, AEPI, MWRK, GYMB, AMAG AMIE, etc. during the last major correction in June-July period. They just sat their clinging to top of range. When the skies cleared, they were the first to burst out and make 20-50% moves. A dynamic momentum based system helps me keep tab of such stocks and when I see a pause in selling, I am very aggressive to get in to such plays. These kind of stocks make 20-50% moves in few weeks, so if you time your entry right, it can compensate for siting on sideline during selling phases.

Avoiding the intense selling phases instead of being fully invested is what I find better ( I might have small commitments in market during sell offs but mostly they are less than 10% of total capital invested). The reason being, if you are trading high momentum, low cap , low float kind of stocks, often during corrections, the bids get pulled down and as a result you end up giving up lot of profit in pre existing positions.

I use corrections to spend time on developing new ideas and researching new systems.