How To Trade A Bear Market

In today's report we would like to examine two issues important to the markets today that should have an impact on trading in a bear market environment.

Short Entry Points

In bull markets prices tend to inch their way higher, continuing on much further than one could reasonably expect they should. In bull market environments breakouts tend to perform well and strength begets strength, oftentimes making it a good idea to chase the bid and buy at a premium. that should have an impact on trading in a bear market environment.

Bear markets are a different animal. that should have an impact on trading in a bear market environment.

Bear markets are wrought with short squeezes as prices tend to drip lower followed by sharp price spikes that make it difficult to find valid entry points. Chasing weakness may work for a day or two, but when sentiment levels reach extremes, like they are now for example, those who entered too late end up getting squeezed out of their positions. that should have an impact on trading in a bear market environment.

Yesterday Worden reports posted an inexact, unscientific study, but an interesting one nonetheless. The study showed that in a down trending environment the market experienced up days between 40% and 45% of the time. that should have an impact on trading in a bear market environment.

What does this mean for short traders? It means that chasing weakness is not a good trading strategy. Rather, entries should be made during the squeeze days, not during the breakdown days. that should have an impact on trading in a bear market environment.

The current market is in a huge sell off and that sell off could theoretically send prices ever lower leaving patient traders behind. Historically, however, those served best over time are those who have waited for the squeeze play before adding to their positions. that should have an impact on trading in a bear market environment.

Near term sentiment is now at utmost extremes. Furthermore, we are now entering a period of triple witching options expiration. that should have an impact on trading in a bear market environment.

Trends are down, but concentrate on falling 10-day averages for your entry points here, otherwise you risk getting caught in a squeeze. that should have an impact on trading in a bear market environment.

Oil Inventory Report

In yesterday's report we focused on the potential, emphasis on potential, that commodities were close to a point where they would correct. Then came the oil inventory report and oil prices spiked once again as inventory levels were much lower than projected. that should have an impact on trading in a bear market environment.

Does this mean that oil will shrug off resistance here and go parabolic? Maybe. that should have an impact on trading in a bear market environment.

But keep in mind that yesterday was possibly, again, stressing the word possibly, just another one day event that will quickly erode. that should have an impact on trading in a bear market environment.

According to the popular financial blog Seeking Alpha, there is currently no correlation between the inventory report and the price of oil beyond one day events like the one experienced yesterday. Don't get us wrong here. Oil may indeed be headed higher without a major correction. All we are saying is that it is unlikely that yesterday's inventory report will be the event that spurs prices on toward a parabolic run. that should have an impact on trading in a bear market environment.

In fact, overnight oil futures are already trading lower. that should have an impact on trading in a bear market environment.

What to pay attention to here now is the dip. If oil opens lower today and dip buyers once again buy aggressively, then we could see the oil trend continue on its merry way. But if buyers start to ease away, oil could be ready to experience a healthy correction as we proposed it might in yesterday's report. So, the next day or two will serve as an important indication of what to expect for oil in the near term.

Summary: While the trend is now sharply down and with support at the lower b-band still quite a distance away, the short side of the trade is where everyone needs to be positioned. However, with sentiment levels at extremes and with triple witching options expiration nearing, sharp upward one or two day bounces are likely. Rather than chasing prices on new short positions, it would be prudent to wait for short squeezes up to the falling 10-day average before adding on here.