Looking back about as far as IBD shows, only once did the market not follow through to the downside over the next week after such a big drop. Only the February romp was followed by an up week. That's the bad news.
But if this is just a continuation of the August 15, 2006 rally (this just theory, relax, but I believe it's possible, and we'll only prove it in hindsight) then this could just be another quick deep violent correction in the march higher. In the 2003 rally, the market experienced 8 pullbacks/corrections of 5% or more over anywhere from 2 - 5 weeks with the longest coming in the beginning and middle of the move. The deepest was 7.6% right in the middle of the move. The move came obviously after the 2000 - 2002 Bear Market, but the correction that preceded the move was 17.6% after the October 2002 Rally. The current rally that started on August 15, 2006 was preceded by a 15.3% correction. Both periods experienced extremely negative news; Iraq, al-quaeda, jobless recovery, high unemployment, coming out of a crash, deficits, etc...; this time; high oil prices, inflation, credit crunch, interest rates, terrorism, Iraq, Iran, al-quaeda, etc... You get the point. 1991 was another similar year of all out bad news and lasted about 1 1/2 years into 1992. 1995 - 1996 years the market moved for 1 1/2 years after the 1994 Bear. Which was preceded by the same type of up and down no progress market of 1992, 1993, & 1994 after the 1991 Rally, like we saw in 2004, 2005, 2006 rallies after the 2003 Rally.
So if the average length of a rally after a major correction/bear is about 1 1/2 years and my theory is true, then we are only in the middle of the move with the best to come. So the leaders that survive this current pullback/correction should be the big winners of this Macro Bull Market. We could continue to rally through the 1st quarter of next year with a few more pullback/corrections to go. But some stocks and sectors have topped (which is great for bear market short sellers, as it will take at least 5 months to setup the shorts), and the new and some former leading sectors are setting up and in a holding period for the next leg up. This would also work into my China Olympics Topping Theory, where the Chinese will slowdown and pound their chest more once they don't need to impress the world and keep it happy, right after the Olympics or World Expo.
We'll see, it would be great if I'm right, otherwise back to the drawing board.
I accept comments.
PS
Right now you should definitely be out of any stock that you are down on or barely made any money on. You can hang onto stocks that you have a cushion on only if they have superb fundamentals and great technical action (i.e. barely correcting considering the big down days and showed good volume on the run up with most new highs coming on higher volume). And don't forget to analyze your past trades and keep an eye on the market, you never know when we could turn higher, it only takes 4 days(I stole this one, IBD).
Goodnight
1 comment:
Agree with your bullish theory. If Thursday 7/26 didn't set the intraday low of this correction, I see the next support at 1451 - 1465 for SP future and 2460-2550 for nasdaq. Both charts show very strong support at those ranges with 250 ma lying just below or at the lower end of the range, so I kinda feel we're gonna hold the levels.
With the nyse mostly electronic and uptick rule lifted for short selling, the nyse stocks are bound to be more volatile. Welcome to the world of free trading. With less interference from regulations and specialists, We'll see more violent moves and we'll learn not to panic at the end of a correction. Being cautious at the top and take half off the table may be a conservative play that reduces your position size, increase your closed p/l, and makes it easier to hold the rest until it seriously tested the support. And if it bounces back there, buy it back, buy it back aggressively since you know it's good.
Sometimes you do sell too early and see the stock going straight up. And sometimes you are glad that you at least have taken profit on half of the position since the other half ended up in red, or flat. Sometime I hate myself for making too much small money, sometimes I held on tight but only see my whole unrealized profit vanish. But I guess over time we'll learn to distinguish between a bullish top when the momentum can carry through for another leg up, and a weak top where most likely some profit-taking will take place.
Right now it's too late to take profit, and too early to bail. But of course if your loss will be too huge to bear when the stocks break the next support, then get out no matter what. You do have to save yourself for the next trade. You have put up too large a position this time. It's ok, take the loss, next time you'll be more logical about how much to buy, and how much to add.
I've turned bullish on the US economy and Chinese economy over the last year. In my mind, China is like US's new west... while US is also China's new frontier. Globalization enables both to take advantage of the other economically. For US, China is as large a market as domestic market, even larger with Chinese people getting richer and starting to spend money like they make it. Think about what can happen when US companies gain market shares in China over the next decade. While for China, US is the best place to find higher technology, better management team and service products. Working with US is crucial to China's technological advance and real growth. And both countries have been practical enough to work toward that mutual beneficial direction. I see this as the major theme behind the economic growth of next decade.
So right, I don't see Chinese economy slow down dramatically after 2008 Olymics and 2010 World Fair. The stock market may have a correction, the economy may slow a bit, but the country's growth is far beyond what Olymics or World Fair call for. It's like saying after buying a diamond ring there is nothing left for love any more. I think it's just the start, just the trigger.
But of course, dramatic political issues could change the course of history. For that I can say much, but I see China as a very smart negotiator, and hopefully tentions will stay tentions, or even be dissolved quietly.
Just my two cents, as a trader to common traders. Just three years into this trading world, I feel I have a lot to say, but naturally I could have said it better if I had 20 years' experiences. So feel free to disagree.
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