It is important for investors and particularly traders to constantly remind themselves that we are still in a downtrend. I say this because it looked like things were mending during the middle of last week as optimism for Greece’s austerity plan and a combination oversold conditions and pessimism provided a vigorous bounce off the lows. Then Friday hit and the gloom returned.
The Trend Is The Bull’s Enemy
I was frankly surprised that Friday ended up being such a negative day after the market and the NASDAQ specifically had such a strong couple of days. The tech-heavy index has been lagging, so it was a great sign for the bulls that it led the charge forward. Then Friday rolls around and the pre-market futures are positive again, only to give way to a heavy bout of selling. Pundits will give their reasons, but I simply think it is a fact that we are in a downtrend.
One has to remember that there are a lot of longs that have bought stocks at higher prices and will be eager to sell into any rallies in order to break even and recoup their money. What does this do? It acts as a lid on the market and makes any rallies hard to trust from a trader’s point of view. I think this is what we saw on Friday.
When the market is trending up, there is no overhead resistance as this is called, so rallies tend to last. On top of that, you get investors anxious to buy so as not to miss the market’s upside. I think this phenomenon was a big reason stocks rallied so much over the past two hears until May. Never discount the important of human emotions when considering how the market is doing.
Headline Driven
All markets are “headline driven” meaning stocks react to various headlines that come off the wires, but I think this market is especially so. That is usually the case in down markets as investors are jittery and looking for a reason to sell. In bull markets, many negative headlines are simply ignored. Unfortunately for the bulls, this means that our market is held hostage by anything that comes out of Greece. I don’t think anybody believes that the worst is behind that situation so be prepared for more rockiness.
The best thing to do in this environment is to be defensive and protect your capital. It will be much easier to profit from better times if you are not playing catchup and trying to regain large losses. Trying to be a hero and buying heavily during bad times is too risky and unnecessary in my opinion. There will be plenty of time to get on board once the macro picture improves, which it will one day for sure. That time just isn’t now.
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