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How to Trade a Bear Market

By Jeff Clark
Thursday, October 1, 2015

You cannot ride a bear.
 
Rodeo cowboys score points by staying on the bull as long as possible. Investors profit by doing the same.
 
But a bear is a completely different animal. No cowboy is crazy enough to saddle up and try to ride a grizzly. Yet investors try it all the time – and they get mauled...
 
Bear markets are not for riding. They're for trading. That means you wait for severely oversold conditions before you buy anything. Then you sell when conditions become less oversold.
 
And you wait for severely overbought conditions before selling stocks short. Then you cover those trades when the market turns neutral.
 
It's not a buy-and-hold environment anymore. It's a scalping environment – play only the best setups and take profits quickly.
 
This week has been a terrific practice session for trading a bear market. Stocks started the week in oversold territory and drifted even further into the abyss during Monday's selloff. But if you paid close attention, you would have noticed that several technical indicators were approaching "extreme oversold" territory.
 
For example, the McClellan Oscillators for the New York Stock Exchange (NYSE) and Nasdaq closed below their lower Bollinger Bands on Monday. Bollinger Bands indicate the most likely trading range for a stock or an index. Whenever a chart moves outside of its Bollinger Bands, it indicates an extreme condition.
 
Take a look...
 
 
 
The blue arrows on the charts point to times when the McClellan Oscillators have closed below their lower Bollinger Bands in the past year. In every case, the stock market was within one or two days of a strong oversold bounce.
 
So with the McClellan Oscillators in extremely oversold territory, this was the first clue that we were getting close to a bear-market rally.
 
Sure enough, stocks turned higher on Tuesday... and yesterday we got one of the strongest rallies of 2015. The S&P 500 traded up as much as 30 points during the day.
 
Traders who tried to "ride the bear" and held short positions into oversold conditions got hurt yesterday. They likely gave back most, if not all, of their short-sale profits.
 
Traders who understand how bear markets work would have used Monday's oversold conditions as a chance to take profits on their short sales and then to position themselves for a bear-market bounce.
 
If we're entering a bear market, then we're going to see many more weeks like this one. So we'll have plenty of opportunities to profit. Just remember – we don't ride the bear. We scalp it instead.
 
Best regards and good trading,
 
Jeff Clark




Further Reading:

Earlier this year, Jeff shared his favorite patterns for identifying short-selling opportunities... These are the chart setups he looks for to profit as stocks move to the downside. Find out what they are here and here.
 
Brian Hunt and Ben Morris recently shared a simple and powerful way to save your portfolio from the next market crash. "In the case of an all-out financial storm (like many are predicting right now), this will prevent catastrophe," they write. "It has worked in the past... and it will very likely work again." Get all the details here.

Recent Articles
Market Notes
Sports-apparel company Nike jumps 24% over the past five months.
 
Home-security stock ADT sinks to a new 52-week low.
 
Mortgage REIT Hatteras falls to a new all-time low... down 20%-plus in 10 months.
 
Shares of Advance Auto Parts soar to a new 52-week high... up 45% over the past year.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1907.11 +1.2% -3.3%
Oil (USO) 14.62 +0.1% -57.5%
Gold (GLD) 106.83 -1.1% -8.1%
Silver (SLV) 13.89 -0.6% -15.1%
U.S. Dollar 96.32 +0.4% +12.1%
Euro 1.12 +0.0% -11.7%
Volatility (^VIX) 25.45 -5.1% +56.0%
Gold Stocks (^HUI) 106.61 +1.3% -45.5%
10-Year Yield 2.06 +0.3% -17.9%

From The Crux
World ETFs
Symbol Price
Change
52-Wk
Israel (ISL) 16.80 -1.4% -0.3%
USA (SPY) 190.32 +1.2% -1.5%
Japan (EWJ) 11.36 +1.5% -2.4%
India (IFN) 24.25 +2.4% -3.0%
China (FXI) 35.35 +2.2% -6.0%
Taiwan (EWT) 13.08 +2.1% -12.6%
S. Africa (EZA) 53.63 +3.0% -14.5%
Russia (TRF) 9.76 +0.9% -18.9%
S. Korea (EWY) 48.73 +3.9% -18.5%
Singapore (EWS) 10.14 +1.0% -21.4%
Canada (EWC) 22.70 +1.7% -24.4%
Lat.America (ILF) 22.45 +2.4% -37.8%

Sector ETFs
Symbol Price
Change
52-Wk
Software (PSJ) 39.76 +0.2% +12.3%
Consumer Svcs (IYC) 136.49 +1.3% +10.8%
Retail (PMR) 36.70 +1.6% +12.3%
Utilities (XLU) 42.96 +1.0% +5.7%
Real Estate (IYR) 70.55 +0.4% +5.8%
Construction (PKB) 21.96 -2.5% +4.5%
Insurance (IAK) 48.57 +0.9% +4.8%
Health Care (IYH) 138.48 +1.3% +4.2%
Big Tech (QQQ) 101.03 +1.6% +3.4%
Defense (PPA) 32.83 +1.5% +2.3%
Financials (IYF) 83.65 +0.6% +1.4%
Semis (PSI) 23.55 +3.1% +3.9%
Industrials (IYJ) 96.07 +1.3% -3.5%
Media (PBS) 23.81 +1.9% -2.9%
Biotech (PBE) 44.85 +1.7% -2.5%
Transportation (IYT) 139.01 +0.5% -7.0%
Telecom (IYZ) 26.87 +1.3% -8.2%
Water (PHO) 20.42 +0.8% -16.6%
Basic Mat (IYM) 64.33 +1.5% -23.8%
Alt. Energy (PBW) 4.05 +1.3% -34.5%