A Warning About Bear Markets from William O'Neil
We are currently 5 months into a 25% Deep Correction / Bear Market on the Nasdaq Composite. We are trending below all daily key moving averages on this Major Index.
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Outside of cyclicals and energy names, there is little in terms of developing leadership.
This type of environment, unless you are used to trading intraday or 1-3 day swings can be incredibly frustrating to traders as it feels like the breakouts and setups that had been working so well when the market was in an uptrend have suddenly lost their edge.
However, it’s not that breakouts don’t work, it’s the overall market environment. At this stage, stocks have been and continue to see distribution from funds & institutions. Gap ups on earnings and other breakouts are opportunities for funds to sell into that liquidity.
Given this, traders should recognize the shift and adapt accordingly
O’Neil puts it simply “You absolutely do not buy breakouts during a bear market. Most of them will fail.”
From How To Make Money In Stocks page 151:
This warning is a clear reminder that the setups that work in uptrends do not have nearly the same effectiveness when the general market is trending below moving averages.
How long this correction/bear market last’s no one knows. We could put in a bottom next week or see chop for months more.
The key things to be on the lookout for:
Leadership groups to develop & diverge from the market decline and show RS
Follow Through Day’s on the Indexes
Feedback on pilot trades to consistently be positive.
Be patient and use this time constructively to work on your trading rules, do studies of setups, and otherwise work to build your trading foundation.
Reading trading books is a great way to improve your process during this time. Here are my Top 20 recommendations:
By taking step back now as the markets are not favorable you are preserving your financial capital as well as your confidence. The longer this bear market lasts the stronger the uptrend and the greater the opportunity will be on the other side.
I particularly like Jim Roppel’s Rubber Band Analogy for market corrections:
Stay optimistic! Be Ready! A new uptrend complete with the next batch of True Market Leaders could be just around the corner.
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