Bear Markets Separate the Men From the Boys – Use This Approach To Make Money

Posted 9:40 AM ET - Yesterday the market broke key support at SPY $187.50 and it flirted with $182 before bouncing late in the day. The price action is very bearish and we are likely to trade below that level in the next week. Global markets were trashed overnight and the Nikkei was down 1000 points. European markets were down 3% and Germany's IP came in light. The downward momentum has been set and there is nothing to stand in the way. Earnings season typically attracts buyers. The strongest companies posted results and buyers temporarily slowed the market decline. Domestic economic conditions have been strong relative to the rest of the world. ISM services and the Unemployment Report were weak and that casted serious doubt on our economic strength. Credit is the primary concern. We haven't seen any defaults, but investors are fleeing for cover. U.S. Treasury's and gold are rallying. The market has crowned and we are making lower highs. Sentiment is bearish and key technical support levels have been breached. During the last rally, we weren't even able to challenge the 100-day moving average before rolling over. The S&P 500 will take out the lows from last August. We need to find meaningful support before we can rally. We are likely to hear of some hedge fund casualties and I'm certain that a number of small energy producers will go under. These failures are relatively insignificant. Emerging markets pose a greater concern. Russia and Brazil are very dependent on energy revenues and we could start seeing some cracks in the dam. Global credit markets are intertwined and there could be a domino effect. China's economic growth is slipping. Many worry that their shadow banking industry is filled with junk and that defaults will start showing up. Their economic releases are extremely important and I have these dates circled on my calendar. Any substantial decline in activity would be very bearish. Given the gloom and doom that surrounds us; my trading strategy might sound implausible. I have been day trading from the long side all year and I've been making great money. Yesterday, I didn't do a single short and I had fantastic results (12 wins and 3 losses). I'm looking for stocks that have been pounded and that have formed a solid base. If they are rallying through resistance and they have relative strength, I buy them when the market stops going down. Any little pop in the market and these stocks take off. I don't want to overnight these plays because the move often fizzles out. These stocks are hot today and not tomorrow. So many stocks are grossly oversold that they are ready to rebound as soon as the market finds support. If my trading system has a buy signal our probability of success is extremely high. We look for price compression and a breakout through horizontal resistance. If the stock is showing relative strength intraday, we target it early and we look for a good entry point. This strategy has worked well all year and I don't have any reason to deviate from it. Many traders in our chat room are using the pattern we trade to short stocks and they are doing well. Yesterday I closed out my remaining bullish put spreads and I bought back my bearish call spreads. All told, I made money. Not a lot, but I did make money. Time decay was starting to kick in and the stocks I selected held up extremely well. As I've been mentioning in my comments, I am looking for stocks that have been nailed and that have formed solid bases. I did not sell put spreads on any FANGs stocks. I did that before earnings and I closed those trades for nice profits before the company announced. I own a few stocks and I own a few calls. My overnight risk exposure is tiny. I am going to identify strong stocks that want to run this morning. As the market pulls back, I will look for relative strength and price compression. When the stock breaks out of that compression I will enter the day trade. If you're day trading from the short side, I suggest lining up your trades and waiting for a small market bounce. If the S&P rallies and the stock can't get off the deck, you know you have relative weakness and a good shorting aspect. Short the stock when it breaks horizontal support on a five-minute basis. Swing traders, be patient. I still believe we will probe for support and it doesn't make sense to sell bullish put spreads yet. We need to see what happens when we test SPY $182. If you've been making money this year - congratulations. This is the price action that separates the men from the boys. Many traders will be washed out. . .

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