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Wait for Confirmation of the Move


The hard part in trading is not making the gains: It is keeping them when times get tough.


Good morning, Minyans,

The mood on the Street seems mixed as participants grapple between whether or not the action is presenting us with bargains or throwing off big warnings. Emotions are running high and the prudent speculator will immediately be a step ahead simply by staying calm, remaining patient and resolving to wait until the dust settles before committing any substantial capital.

Unless your primary style is to play the short side, most traders make their money when markets and stocks rise but can lose these gains and more when a correction sets in. Ironically, the hard part in trading is not making the gains: It is keeping them when times get tough. Rather than fight the tape or try to force anything, I have often found that the best way for an individual trader to successfully navigate a time such as this is by raising a substantial amount of cash and sitting on the sidelines. Hopefully by now you have already done this and are now pondering the thought of when to re-enter.

One of the biggest frustrations that will take place is when the market does finally bounce and a trader is sitting on the sidelines, not participating. Pundits immediately show up on TV with smiles and the mood shifts. However, only those who remained in stocks during the decline fully experiencing the respite in selling. The potential damage sets in when a trader rushes back into the market without confirmation of the move and immediately is met with new losses as the market retraces yet again as trapped longs lighten up. It is not easy, but successful trading is waiting on the sidelines during the decline then waiting some more during the first bounce. The key is to have confirmation of the move and not act until you know for sure it will last longer than a day or two.

The market is getting to very oversold levels and I am quite sure a strong reversal is coming. Traders have stepped aside quickly to protect gains, while shorts have piled on. The downside has been sharp and swift, however at some point a violent and powerful reversal will set in. The question when this happens will be, is it merely a pop before we head lower, or is it an actual bottom. Unfortunately, we will only know this in hindsight, but the prudent trader will serve himself well to wait it out until we see a series of followthrough days in addition to individual charts setting up underneath.

I have very little on the radar other than some extreme contrarian plays I am in from late last week.

I have not been high on the banks for several months, but as the holiday season rolls around I am considering giving shares of Citigroup (C) to family and friends as a lock box longer term hold. While many of the banks and financial institutions are trading as if they are going out of business, I suspect that soon participants will start to view these as value plays and step in. Stocks like Bank of America (BAC), Wells Fargo (WFC), JP Morgan (JPM) and Washington Mutual (WM) are all starting to look extremely oversold and due for a bounce. I am not advocating these for trades, but if you ever wanted to file something away for the kids or grandkids, this would definitely be the time to start.

It feels too late to short and too early to go long so I will continue to sit it out and wait until I see better action. When a bounce finally does set in, I have many stocks I am watching and will wait for them to set up before I step in.

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No positions in stocks mentioned.

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