A Cyclical Bear Should Not Be Feared If You Trade It Correctly!
Source: Dave Banister, Active Trading Partners (2/11/10)
A bear cycle is nothing more than a bull chart flipped upside down. If we are in a bearish cycle for a period of several months as I believe we may be, then you need to change your trading plans accordingly.
In my January market forecast, I outlined the sentiment indicators being at the same peak levels last seen in July and October of 2007. In addition, consumer sentiment had rallied up from the March '09 lows, and yet the "Present Situation" sentiment was at decade level lows. With these factors along with my Elliott Wave patterns peaking, the market peaked on Jan 19th the following day, and has been trending down ever since. The trend is your friend as they say on Wall Street, but the key is identifying the trend before everyone else rushes into the trade.
A bear cycle is nothing more than a bull chart flipped upside down. If we are in a bearish cycle for a period of several months as I believe we may be, then you need to change your trading plans accordingly. Of course investors and traders can still find stocks in an uptrend and attempt to benefit from their continuing rise; we certainly continue to look for those opportunities for my subscribers. However, with the SP 500 likely to trend down into June to the 910 area according to my views, we are set up much better to consider using the Bear and Bull ETF vehicles for our preferred trading vehicles.
Should the SP 500 continue working its way down in an "A-B-C" fashion as I suspect, then we want to hone in on the bear ETFs that will be climbing in an A-B-C fashion in order to best profit. Avoiding single stock risk is wise in a bear cycle, and investing with the leveraged ETFs is a way to avoid single stock risk and still be on the "right side of the trade." You see, the best traders know that it doesn't pay to be a perma-bear nor a perma-bull. It pays to be on the right side of the trend, and right now that is obviously down. Emerging Markets and Small Cap stocks are the most vulnerable to continuing market downside corrections into June. The paired ETF trades at key pivots for the 3x leveraged funds are EDZ for the bear side, and EDC for the bull side. In the small cap arena, you are looking at TNA for the Bull side and TZA for the bear side. My subscribers are profiting from trading the extreme selloffs and counter-trend rallies by entering either the bull or bear side of these ETFs at those extremes.
The advice is not to continue to bang your head against the wall looking for stocks that will fight the normal cyclical corrective downtrend, but instead to focus on ETFs that you can easily enter into and exit out of, while removing the single stock risk factors that can damage your portfolio. My forecast since my market top prediction on Jan 18th is for an A-B-C correction at a minimum to about 900–920 on the SP 500 index. This will not happen in a few weeks, more likely 3–5 months or so. There will be counter-trend bounces along the way, but the general trend will be down. I had two major buy signals flash in January on the TZA Bearish ETF fund when it crossed over $9.00 a share. Those signals tell me that the main trend is down until further notice. Higher-than-normal cash balances, less trading and more focus on ETFs are the recipe we are running with at Active Trading Partners. Stay cool and calm, and keep a level head.