Author: Chris Hood
How quickly sentiment can turn.
Any shred of good news can trigger a rally in conditions as bearish as the current market.
I believe that’s what happened yesterday when the CPI numbers came out. We saw a significant reversal as investors hoped for a rate hike pivot, or at least a slowdown, in quantitative tightening.
Just how much strength is behind the rally remains to be seen.
It’s important to remember not to get overly excited about the upswing and set yourself up for failure.
A short article I read on Marketwatch makes an excellent point – that major daily bull moves are more common in bear markets than bull markets.
What many take as a sign of recovery is confirmation that there’s more downside.
Let’s look at what this means for retail traders.
We’ve been capitalizing on short-term upswings and downward moves in the Trade Command Network.
Now I’m going to admit that a few positions got nailed by yesterday’s pop.
However, those were minor losses.
We’ve more than made up for them with two consecutive short trades on TSLA that netted us a total of $2100.00 over two days.
We never risked more than $200.00 on either position.
This came from trading our plans, listening to the indicators, and keeping in mind that we are in a bearish trend.
Any run to the upside in a bear market is a countertrend movement.
Stocks pull back on their way up in bull markets, and bear markets are prone to regular rallies. Small rallies mean nothing for the overall market direction.
If your alerts are correctly set, you can see these rallies coming.
Or at least that is usually the case. Sometimes, the market defies everyone’s expectations.
Right now, the most crucial trading concept is to never chase a rally in a bear market.
You’re fighting the overall trend.
If you missed the uptick, your best play is to find the resistance level where you’ll look to go short again.
So what’s that level where we might begin looking for long puts or other bearish plays?
Let’s take a look at the SPY daily chart:
I’ve highlighted the standard bear trend pattern here with white arrows.
Lower highs and lower lows keep appearing, so I’m skeptical of any bottom forming. After all, we’re not even a year into this bear market.
I would be shocked if the rally had any strength past $415.00 – $417.00.
This is precisely where the red resistance levels sit.
And if we look at shorter time frames, we can find similar resistance levels at $410.00.
When your signals show a slowdown in upside momentum near these pivot points, look for your opportunity to go short again.
There’s no need to be afraid of down markets if you understand how they work.
You must keep your head about you, or as the MarketWatch piece suggests, “curb your enthusiasm.”
Trade smart and trade with a plan.