Jedi Training: Signs Of A Stock Market Bear Taking Shape

| About: SPDR S&P (SPY)

Summary

This is a follow-up on our, "5 Steps To Catch A (Stock Market) Bear" June 9th.

We have been fundamentally bearish.

But you need to see it happen before you get excited about it.

We use Jedi technical powers to help us confirm our bearish fundamental call.

Click to enlargeOverheard on the Star Wars set, "Luke, you can't just barrel into stocks because your fundamental work says so, you have to let the technical force guide you. Then be a trading Jedi master you will be."

Yoda knows what he's talking about. We, generally agree.

We've seen many traders hope for one thing and something else happens.

Everybody talks about all the great trades they make.

You never hear however the full truth. They didn't tell you about the other few trades, "I got murdered in this stock because it went against me from the start and like a dummy I added to my position and held it despite it constantly going against me."

You ever hear someone say that? No? Me neither but I'll tell you that's a bigger truth then all the great trades you hear about.

That IS the reality of most trades and traders which is why it's not as simple as it sounds. The above scenario is a classic case of lack of discipline. If you are able to avoid ever having to even think that (by getting out of losers and staying in winners after confirmation), I think you'll make a lot of money!

You Need To SEE It Happen

Believing in something and seeing it happening are two different things. You need to see it happen before you get excited about the trade. That's called confirmation. These are basics but most people get carried away in emotion because they 1) put so much time into their analysis or 2) don't want to let go because it was, "my idea, and it was a good one."

To "Catch A Bear" you need to see it happen. You need confirmation. You can read all of our stuff and get bearish. That's all well and good. But the critical factor is you need to see it happening. You need to see the market giving it to you.

We'll show that we think we are seeing it happen. Before that though, here's what we said June 9th in 5 Steps To Catch A (Stock Market) Bear.

"Signs to look for include: the market breaks recent multi-day lows, closes on its lows, goes down on bigger volume than it goes up, consistently opens down. Those are signs of a bear."

When we wrote that report here's what the market looked like at the time. [We're using S&P 500 ETF which we love to use better than futures when analyzing the market (NYSEARCA:SPY)].

Click to enlarge

Let's see how the market was "acting" when we wrote that report.
Breaking multi day lows: No

Closes on its lows: No

Goes down on big volume: Starting to

Consistently opens down: No

And our most important gauge. We wish, we wish we could name this for the fantastic trader we learned this from but we will refrain so let's call it...

ELAZAR ACTION TRADING RULE ONE

Here's what we wrote,

"This may be incredibly simplistic but it is amazingly important. If you can honestly say to yourself, "The market is going down" because you see it going down, that is a good sign. But if you can't honestly say that, it's not a good sign."

Can we honestly say the market is going down because we see it going down: No

That was then. Let's flip, using our pivot date of the report, How to Catch A Bear, and see what progressed next.

Click to enlarge

Now we didn't expect it to happen June 9th. We didn't say that we expect these factors to start "today." But they did.

We wrote the report to state what people should look for. We saw people getting excited about our work and getting aboard, but we thought it was important to take a step back and say, ok you are a bear, but let's see it happen before we get excited.

And it seems to be setting up.

Let's go through the same exercise we went through above.

Breaking multi day lows: Yes. It's the lowest it was since May 25th. Breaking SPY 205 would be another nice confirmation.

Closes on its lows: Starting to

Goes down on big volume: Starting to

Consistently opens down: Starting to

ELAZAR ACTION TRADING RULE ONE, Can we honestly say the market is going down because we see it going down: Yes

You are doing well young Jedi. I see the force starting to guide you.

Technical Jedi training for fundamental analysts

Based on our experience and watching some of the best traders, it's incredibly important to match fundamentals AND technicals. Both are good on their own but not great. When you can get them to align, it's usually a powerful story. The best traders look at both. You have to be disciplined enough to wait for that to set up of course.

We think the bear could be setting up but will have to continue to look for confirmation.

Disclosure: Yoda is short ES futures and Luke is legging into his positions patiently. He decided not to barrel into stocks based on Yoda's good advice.

Happy trading.

Good luck and please be in touch. All of your comments teach US a ton.

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