Market Corrections:
Market corrections are healthy as they allow advancing stocks to take a step back and breathe. Corrections of 5%-10% allow the leading stocks to shake out all weak holders while setting up support levels and sometimes new base formations. Humans (traders) are typically sheep so they pile in at the top and run for the doors at the bottom. Don’t follow the crowd, so don’t panic during a market correction.
Look at the overall BIG PICTURE before making major decisions on a short term intraday or daily chart.
Even weekly charts can fake you out when you start to see red across your portfolio screen (during a large market correction).
Market corrections and flat markets allow intelligent investors to study conditions carefully while they sit on the sideline patiently awaiting the defining trend. Money is made on the big moves, not the minor day to day moves. Corrections allow big moves to establish themselves.
Don’t go crazy over the minor day to day moves! Look at the BIG PICTURE!
As for Bear Markets:
- Keep in mind that nearly 75% of all stocks follow the general market trend
- Your cash doesn’t need to be committed to the market at all times. This philosophy is suited to making the most money in bull markets or markets trending higher
- It is psychologically and emotionally healthy to get out of the market from time to time, especially after a losing streak
- It is essential to keep up your watch lists during bear markets and/or general market corrections as many present and future leading stocks are building new bases
- Stocks that correct the least and display the highest relative strength ratings tend to be the leaders of the next up-trend or bull market. Take note of all stocks that are base building during corrections; a cup with handle, flat base or major moving average support.
Signs pointing towards a correction or bear market:
- The major indexes will advance on below average volume
- Stocks making new 52-week highs will be limited
- Stocks making new lows will increase
- Major indexes will fall below the 50-day MA and/or the 200-day MA
- Index averages will start to under perform. Relative strength lines will head south
- Major publications will tout hot stocks at key market reversals (market tops)
- Institutional (smart money) will bail on huge volume
- General market index down days on excessive volume (always above average)
Chris,
As per your earlier blog, you said this about JASO
“JASO – 57.86, a long time favorite on this blog; it flirted with an intraday all-time high during the opening minutes this morning. It will become a $60-$100 play if it can establish a base or support near $60.”
With the current solar run and what do you expect on tomorrow’s JASO’s earnings? I have small positions on this but not sure whether to hold this during earnings or not.
Just curious
R
R,
This is what I told another reader in e-mail:
“I can’t tell you to sell or hold (JASO) (that is your decision). However, you can always
buy 1 put option for every 100 shares you hold long. Think of it as insurance (the
premium you pay would be the same as paying you typical car/home/life insurance
premiums. It only pays is something goes wrong. So, you don’t want it to pay off.”
He cashed out today with a 58% gain or an 11:1 R trade.
I still have shares in JASO as I write this but I am looking to sell this afternoon after the huge gain today. I don’t like holding through earnings announcements.
I sold my position in VMW for a small gain today. It lost 13 points on a bit higher than usual volume and it went below its 50 day MA. I will buy back shares when i see a positive change of trend.
Hi Chris…do you see this market correction coming to an end here soon????What is your opinion and do you think one should be buying into weakness?? Thanks, Janet
Hey Chris,
VMW showed a lot of strength, even after the earnings, but lately it has been beaten badly. Any views?
Hey Chris,
I have just started recording the NH-NL data from IBD after seeing how you are using it to gauge the strengths and weaknesses in the market. But, how do you determine what percentage to set as neutral, Strength, or Weakness? Also, would you mind sharing your data? I have just started so my NH-NL only goes back to this september.
-kind regards,
Mike
Hi Chris,
I also think that this is a correction, and it will not be a very deep one, because it is an election year and Bush will not want to have a bitter ending to his term. You see that everytime the market loses ground – some unknown force comes to the rescue ! ( like superman 🙂 ). I also think that one should take some action in falling markets and be more proactively shorting.
Thanks for all your postings !!!
Good post that reminds investorso to keep things in perspective. I know it can be difficult when you see the Dow lose over 200 points each day, but emotional investing won’t do anyone well.