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How To Play The Stock Market Correction

One of the first things I learned as a market analyst many years ago was that most retail speculators spent way too much time trying to predict market corrections, and far too little time focusing on making money is trending markets. I learned this first hand when I stumbled upon the twice a month 401K pay-day cycle in stock indices - a bullish occurrence -- while searching for clues as to market behavior prior to large corrections - bearish events.

Next question: what is the best thing about market corrections for currencies and stock indices? Answer: history tells us they always lead back to a resumption of trending markets. See S&P 500 chart in Figure 1.


Figure 1. Daily S&P 500 chart

So taking the answers from those two questions, we realize that while it is unlikely that we can predict a market correction, it is obvious that when one does occur it is a good idea to prepare for a resumption of the predominant trend. This is why professional fund managers and traders focus on buying into asset class markets which are accumulated by pensions and other institutional investors, and wish to avoid the volatility that accompanies major corrections.

The bottom line: over time you will be better rewarded for buying dips in uptrends and selling rallies in the occasional downtrend than on focusing on trying to predict and capitalize on the timing of price corrections.

To see Jay Norris point out trade set-ups and signals in live markets on the London/U.S. overlap tomorrow go to: Live Market Analysis

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.