Profit In A Down Market

Patterns for Profits Newsletter - April 1, 2008

Blood In The Streets
The old adage that the time to buy is “when there is blood in the streets” is going around again. Oil prices, despite a recent correction, are still up. The mortgage market keeps going from the current “bad” to a new “worse.”

So, is it the time to buy? Buy what? Is it time sell everything and sit on cash? And watch the value of your dollar slide versus the Euro and every other world currency? It is time to look harder for profit in foreign stocks? There is always profit in a down market.

Stay With The Basics
Here I don’t mean basic stocks but your own investment basics. What is your asset allocation? Are you using the best technical analysis tools? Have you given thought to market psychology? Fear, greed, and what else is driving the day to day market? Now is not the time to panic. Now is the time to firm up your fundamental and technical analysis. Follow market patterns, buy, sell, take your profit in a down market.

When to Trade and When to Stay on the Sidelines
The “blood in the streets adage” is often cited after the fact. Someone takes a huge profit in a down market. They purchase at a stock’s low point and sell at a later peak. Then forever, it seems, they brag about how smart they were. Be wary of taking such self aggrandizement too seriously. There is always money to be made and there is always money to be lost. That is where the same tools that served you well in the past are still there for you. Stick with a process that works. The focus of your investments may indeed move off shore or from oil to real estate to emerging tech. If you cannot define a pattern or cannot find reasons in the fundamentals of a company that support a purchase at a low point in stock price then there is no problem in sitting on your capital until you find the right situation. When you find a promising situation and your stock market data analysis fits, go for it. Then you too can brag, later, that you bought when there was “blood in the streets” making your profit in a down market.

The Old Enemies
Greed and fear are still the old enemies of the trader or long term investor. Taking daily stock of how you are feeling about the market and trading is a good drill when things are chaotic. Sticking with your fundamentals, your plan is even better. If you find yourself making excuses for deviating from your trading routine, cutting corners … don’t! Review patterns, look for opportunity, and use your own system to evaluate. There are always good opportunities to make profit in a down market, even with, and perhaps, especially with “blood in the streets.”

Perspective
The “dismal” science of economics can be pretty dismal. However, a little reading at times can be enlightening. The US has gone through a number of economic downturns. All of these, it seems, were viewed by some as the economic end of the world in their time. Nevertheless, the US economy always seemed to survive. Players changed. Rules of the game were modified. As always the winners are the ones who reliably pick winners or at least don’t continually pick losers. What’s the lesson? Don’t panic. Stick with your plan. Do your homework. When it doesn’t work, don’t do it. When it works, make the trade and take your profit in a down market.

See you when there is no longer blood in the streets and we’ll celebrate your success.

Patterns for Profits Market Watch

Market Overview
The markets have been trading in a range after making new intraday lows in March. These are important lows to continue monitoring as a break below can lead to much lower prices. The current lows made in March found support for the time being at the .382 weekly retracement level using the 2002 lows and the October 2007 highs.

On a shorter term look at recent swings on the daily charts the SP 500 retraced from February 2007 highs and the March lows to the .786 resistance. The volatility with wider daily ranges has continued and most likely will continue. It is not unusual to now be seeing 30 point daily ranges in the SP 500 whereas last year we were seeing 12 point ranges.

On an intraday basis we continue to see very good trading opportunities as the bulls and bears battle.

Many of the commodities saw very heavy liquidation the last week or two as many prices such as gold and crude oil hit unprecedented high levels. The highs may be in for now in many of the commodity markets and we would be looking for retracement sell patterns at this time in some of the commodities.

Patterns for Profits Trading Tip

Green, Blue or Black?
Ski areas mark various runs with degree of difficulty using a color coded system;

Green Run = Easiest way down

Blue Run = Intermediate

Black Run = Most difficult

If you stop and think about it traders could look at their skill levels and categorize their trading skills the same way;

Green Level Trader = new to markets, early skill building phase, has not yet discovered how many ways they can break a leg

Blue Level Trader = intermediate skill level, has enough experience to be dangerous in black coded markets

Black Level Trader = skill level has developed into proficiently navigating many market conditions. Has spent many hours on the slopes of charts and has taken enough falls to know to wait for best conditions.

Most people setting out to ski don’t start on the black runs, they usually have the common sense to start on the green runs, hire an experienced instructor and learn to navigate that course successfully before moving to blue and black runs.

Trading, however, is different; it seems to be a sports arena for many that want to start on the black runs. After many bumps, bruises, breaks and finally an admission that maybe the run is too difficult do they seek help. Almost all have heard how challenging learning to trade can be, but most have a strong resistance to putting money into their education to avoid being sledded back down a slope by experienced ski patrol.

A trader I recently spoke with who has been trading for several years inconsistently said what he need was a better trading platform, yet he had not trading plan, I failed to see how a better trading platform might be the answer to his trading problems.

Most traders I talk with having difficulty are trading beyond their skill level and have no trade plan. It is essential to build skills and develop a trading plan. Seek out help to get from a Green Level Trader to a Blue Level Trader and then to a Black Level Trader.

We offer various levels of coaching; including a one on one program designed to build trading skills, develop a trading plan and evaluate performance. Feel free to contact us for more information at www.tradingliveonline.com or leslie@tradingliveonline.com

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Leslie Jouflas
Kelly Hill