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How to Trade the Market’s Next Bounce |
By David Grandey
All About Trends
November 3, 2009
The key to success in today’s market is having a game plan and
sticking to it. And while I hate to sound like a broken record, and I
constantly repeat it, the game plan for success today is simple: “Buy
trend channel support and sell trend channel resistance.” OR “Buy the
dips and sell the rips.”
Last week
we heard everyone saying you have got to buy stocks in the falling
market.
That’s a
classic herd mentality — what’s the point in buying stocks after we’ve
already run? But the fact is, despite Friday’s sell-off, the uptrend
remains intact and we simply followed the plan we laid out for you
last weekend — ride our shorts down to support in the charts of the
indexes, cover them there and look to buy stocks that are at support.
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Last week,
the market was at resistance, so the game plan was to stay in our
existing short-sell positions until the market hit support where we
would cover and go long on stocks that were also at support. And this
week, the game plan is exactly the opposite.
Why’s
that? Because the market is right at support — yes, it’s only
been five trading sessions and that’s all it took to take the market
from resistance to support.
So as long
as support holds, the game plan for this week is to stay in our
existing long positions as the market attempts to stage a snap back
rally. When that occurs, we’ll take our profits on the long side and
look to go short again as the rally set-ups stocks on the short side.
We don’t
make up the game plans though — all we are doing is simply reacting to
what the market is telling us and trading what we see. And here’s what
we see:
As you can
see from this S&P 500 Index chart, our big picture uptrend is still
intact and oversold at current levels. That doesn’t mean that they
can’t go lower here, it just means that we’re at levels that ought to
act as floors below.
Make note
of is the pink bearish channel back in June and July…I’m bringing it
up because it’s what we want to be on the lookout for with any rally
from this point forward. It’s called a snapback rally and it’s a
reaction to oversold market conditions that causes a fast bounce
upward. But when the fundamentals are still bad on a snapback rally,
it’s actually a very bearish signal that means stocks are headed
decidedly lower.
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To give
you an example of what a snapback rally ought to look like, take a
look at OmniVision Technologies’ (NASDAQ: OVTI) chart
below…
The name
of the game for next week is watch for a snapback rally or dead cat
bounce. When all said and done it ought to look like some sort of
bearish channel then we take profits on all long positions and start
shorting.
When the
market makes a noticeable bounce, watch very closely before going
long. If the market turns tail, it’ll happen quickly and you won’t
want to be on the wrong side of the action.
Sincerely,
David Grandey
AllAboutTrends.net
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Editor’s Endnote:
Don’t forget to send all of your comments and suggestions for the
Penny Sleuth to
editor@pennysleuth.com.
