Last week was a great practice session for trading a bear market.
Stocks started the week with a slight move higher on Monday. But sellers took over on Tuesday and Wednesday, and knocked 100 points off the S&P 500.
That sort of move in just two days caused a lot of panic. Financial television talking heads were clearly shaken by the move. And, traders were buying put options like crazy.
The CBOE Put/Call ratio popped as high as 1.37 this week. Anything above 1.20 shows an extreme level of pessimism.
By Thursday morning, when the S&P 500 dropped another 20 points, it seemed as though just about everyone had turned bearish.
But, if you paid close attention, you would have noticed several indicators had reached levels that have often led to strong stock market bounces.
For example, the Volatility Index (VIX) closed above its upper Bollinger Band on Tuesday and Wednesday. So, the VIX was set up to generate a stock market “buy” signal when it closed back inside the bands (which it did on Thursday). The previous VIX buy signal occurred in early August – just before the S&P gained about 100 points in a week.
The McClellan Oscillators for the New York Stock Exchange and the NASDAQ (NYMO and NAMO) closed below their lower Bollinger Bands on Wednesday. This extremely oversold condition usually occurs at the end of a sharp decline, not at the beginning of one. And, it often leads to a sharp stock market bounce.
So, on Wednesday afternoon, I told my Delta Direct subscribers that – as hard as it might be to do – it was time to bet on a stock market bounce. And I recommended buying call options on SPY – the exchange-traded fund that tracks the S&P 500 [Delta Direct subscribers can catch up here and here].
We weren’t trying to buy at the absolute bottom. And we weren’t looking to hold the position for longer than a few days in anticipation of some intermediate-term rally phase. All we were looking to do was to buy into a position when it appeared the proverbial “rubber band” had been stretched to the limit. Then we would sell when the rubber band snapped back.
We recorded a 39% gain on the trade in two days.
And… That’s how you trade a bear market.
Successfully trading a bear market is not about maximizing gains. It’s about making quick, profitable hits.
You wait for severely oversold conditions before you buy anything. Then you sell when the rubber band snaps back and conditions become less oversold.
And, you wait for severely overbought conditions before selling stocks short. Then you cover those trades when the market turns neutral.
If we are indeed entering a bear market, and I think we are, then we’re going to see a lot more weeks like the last one. So, like I said… last week was a pretty good practice session.
Best regards and good trading,
Jeff Clark
P.S. I see much more than just a bear market ahead… I see the market crashing… this month.
Investors who practice the “buy-and-hold” strategy could lose everything. And while that may sound scary, for traders, it could be a chance to make a small fortune. Especially those who use the strategy I have developed over 36 years of trading…
That’s why I wanted to get this presentation out to you folks. Not only will I detail how you can make money while everyone else is losing their shirts, but I’ll tell you the exact date I think the market might crash.
But, this presentation gets taken down tomorrow night. So you’ll want to act fast. To learn how you could pocket your small fortune when the market crashes, read on here.
Reader Mailbag
Today, a couple of Jeff Clark Trader subscribers thank Jeff for a recent call on gold…
Thank you for all your tips on where gold is headed. I just made a 50% profit on a put option I set up in September, based on you insisting that gold would fall soon.
I’m a new member to Jeff Clark Trader, and your advice on how to be careful with options has helped more than other memberships I’ve had.
And this one was so affordable! I am interested in when it will be wise to get back into GDX before it starts back up… Your instructions are simple to follow. Thank you!
– Kathy
Hi Jeff, just a quick note. I recently joined up and am following your thoughts on GDX. I made almost 100% on a trade in one day, and just over 400% on another in six days. Thanks and keep it up.
– Dave
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].