March 13, 2007 at 6:44 pm | | Comments 1

Downside Damage Creates Opportunities

It all started 2 weeks ago today. The major indexes hit an air pocket after enjoying steady gains for more than 7 months, sending share prices plummeting as key uptrend lines were broken. The landscape changed on that day, and those of us who were paying attention didn’t have to pay for it.

At, we had been holding 3 long positions going into that Tuesday, each of which stopped us out on the opening gap (2 for small losses and 1 for a gain). Fortunately, we were in cash right off the bat, not having to endure the additional damage which followed.

Since then, only short sale candidates have been listed in the Bandit Broadcast newsletter because of the obvious change in character of the market. I discussed this recently here on the blog, highlighting the reasons why the shift in psychology left more than technical resistance overhead.

The bounce which followed the initial pullback has been a textbook sell signal, with prices rising while volume contracted, and I pointed this out on Sunday night’s Market View page at Those who were not already in cash from the broken uptrend lines two weeks ago should be by now, as the bounce has officially failed with today’s high-volume selloff which appears to have started the 2nd leg down.

Bulls’ Fears Confirmed

The bulls who had been holding on in hopes of a return to the highs are tonight having to face reality. Volume was not confirming the bounce, and instead set up a negative divergence which was consummated today. Those holding long positions have missed not only their first sell signal (broken uptrend line), but also the second sell signal (low-volume bounce the past several sessions). This dynamic will perpetuate the “sell-the-rallies” mentality as higher prices will continue to make for good opportunities to raise cash until the correction runs its course.

Bears Gain Confidence

The bears had been in hibernation for many months during the uptrend, and they sprung to life when the correction began. Sensing the pain of the bulls, the bears now have renewed confidence which was confirmed with today’s return of the sellers. Bears will continue to sell rallies, which also adds supply at higher levels and could keep the upside contained on bounces for a little while.

Those Not Short Should Be In Cash

Not everyone trades the short side like I do, but there is an alternative because cash is a position. At, we encouraged members 2 weeks ago to move to cash, and there have been no swing trading candidates on the long side since then. When the conditions change and the path of least resistance in the market is down, it is no time to buy stocks. It is instead a time to sit on a pile of cash and wait and watch while share prices keep getting cheaper. On February 27th, we sent the long-only traders to the sidelines, saving them the pain that would have followed had they remained long. Until conditions improve, they can tend to other matters and not be concerned about a big tank-job like we saw in the market today. Even better, when stocks again become attractive for going long, we’ll be giving them the green light and they will be able to buy at lower prices than we’re currently seeing.

We Put Theory Into Practice

At, those of us willing to trade the dark side are now positioned short and starting to enjoy a nice ride lower toward profits. We’ve waited patiently for the low-volume bounce to fail, and when it did we naturally got more positioned on the short side by way of broken rising trend lines and support levels. As the market goes down, our account values are going up, thanks to the trades we’ve taken on the short side. Those who are not trading the short side are feeling no pain during this market correction, even on a day like today when the DJIA sheds more than two hunsky!

The bottom line is this: good trading is about first preserving capital and THEN turning a profit. A good stock pick service should be pointing out great opportunities for you to do both, regardless of whether you trade long, short, or both. We put our long-only members in cash 2 weeks ago, saving them untold amounts of money just by heading toward the sidelines to preserve capital. What would that be worth to you? And as for the more active traders we serve, they are now seeing nice profits build on the short side. Both camps are finding the $99.95 monthly membership fee to be quite a steal, pardon the pun ;-).

Here’s hoping you make out like a Bandit this week,

Jeff White
President, The Stock Bandit, Inc.

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]

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  1. From » Changes of Market Character, or Just Emotion? on Mar 15, 2007

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