We saw some serious deterioration in the markets this week. All of this action culminated in Friday’s incredibly bearish activity, with the TRIN and VIX giving highly bearish sentiment reads. The TRIN was well above 2 for most of Friday’s session. The VIX popped 24% on Friday putting it above 30 and causing it to close above its upper bollinger band.The volume is picking up on the down moves. Market Breadth reached extremely bearish levels on Wednesday and Friday. (Side note: if you do not understand something I just wrote, please let me know so I can explain it thoroughly).
The SPY monthly chart closed below my thick red trend line. SPY also broke down out of its rising wedge on the daily chart. IWM has a confirmed double top formation on the daily chart. The Nasdaq (QQQQ), Russells (RUT), and Financials (NYSEARCA:XLF) have shown significant relative weakness lately which is important because they are often considered leading indexes.
I made a couple of day trades this week. I had a 5% gain with SPXU on Wednesday. Played TNA for a healthy profit on Thursday. Much to my regret I sat out Friday. However, I am mostly in cash, so I am content with my neutral position (especially because I am not net long). I do plan to start picking up short positions on Monday morning and throughout next week.
The markets are looking very bearish. Please do not read this the wrong way. I am not excited because stocks are declining and wealth is being destroyed. I am excited because stocks are moving quickly and in an increasingly decisive manner. I like to couple fundamental analysis with technical analysis, and the fundamentals have been screaming at me for over a year that stocks should go down. Now, finally, after more than six months in a “bull market” or “bear market rally,” the technicals are joining in on the bearish chant.
Do not let this scare you if you are a new trader. There are many ways to play stocks to the downside. The most simple play in a bear market is to move into cash. If you do not own stocks, you cannot lose money as prices decline. In fact, your broker most likely pays you a tiny amount of interest on your cash; you could also buy short term bonds. Many traders will short stocks in a bear market (sell high, buy low). If shorting is not part of the trader’s strategy, buying inverse ETFs is a valid play to benefit from downward moves in select groups of stocks or indexes. Options traders buy puts in bear markets to make money on the downside.
As you can see, there are plenty of ways to profit in a bear market. If you want me to explain a strategy in greater depth let me know. Otherwise, I will explain strategies at my discretion.
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