Tuesday, August 12, 2014
Whenever there's a swift pullback in the market, one thing always seems to happen...
Lots of folks worry they're going to miss the top of the market and their opportunity to profit as the market falls. So they rush in to short stocks.
But bull markets don't turn into bear markets overnight. There's no need to rush into short positions as the market falls. It's best to wait to short stocks on the inevitable bounce that happens after a strong push lower.
That's why it was a mistake to short stocks early last week. As I told you, the market was oversold and set up for at least a short-term bounce. Traders who piled into short positions last week are underwater today.
So don't let the worry that you'll miss the top make you rush into short positions. The stock market always gives bears a second chance to get in on the short side...
Take a look at this long-term, monthly chart of the S&P 500...
The blue line on the chart is the 20-month exponential moving average (EMA). It's the line that separates bull markets and bear markets. When the S&P is trading above its 20-month EMA, stocks are in a bull market. When the index drops below the line, stocks are in a bear market.
As you can see from the chart, the S&P 500 is well above its 20-month EMA. Stocks are still in a bull market.
So it's not time to short stocks aggressively yet. That time will come when the S&P 500 breaks below its 20-month EMA – like it did in 2000 and 2007.
But even then, there's no need to rush to get short. After breaking below the 20-month EMA, the S&P 500 usually bounces back to "kiss" the line from below. The red circles on the chart highlight the "kisses" in 2001 and 2008. Those kisses gave traders the best, low-risk chances to short stocks before larger declines unfolded.
That's the sort of pattern I'm waiting for before I get aggressive on the short side.
In the meantime, traders should use any declines that push stocks deeply into oversold territory – like the drop we got last week – as a chance to buy.
Best regards and good trading,
"Short-selling is an important strategy for any portfolio," Jeff writes. "If you're only investing on the up moves, you're only taking advantage of half the opportunities." Get all the tools you need to make money on short trades here and here.
While U.S. stocks have headed lower, Jeff says Chinese stocks are quietly breaking out... "This is a BIG DEAL. This is when new bull markets begin... And early investors could make double-digit gains over the next few months." Learn more here: The Big Breakout You're Not Hearing About.
Steel companies are quietly booming... new 52-week highs for U.S. Steel, Steel Dynamics, and AK Steel.
Health care giant Johnson & Johnson soars 76% over the past three years, including dividends.
China's "Dow Jones" is breaking out... the Shanghai Stock Exchange Composite Index is sitting at its highest level since December.
America's entertainment company continues its uptrend... Disney hits a new all-time high.