1 0 Tag Archives: market direction
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Daytrading Stocks During a Bear Market

The US stock market appears to have entered a new bear market since its high at the end of April. While Wall Street generally defines a bear market as a 20% decline, the average bear market drops quite a bit more. As of this writing, the market has declined over 14% from its April high.

Daytrading stocks during market declines can prove to be quite the challenge for day traders no matter how much experience they have. This is due to the fact that market volatility has a tendency to increase during most market declines, whether they are short term corrections or the typical bear market. This increase in volatility can wipe out the trading capital of even the experienced trader if they do not adjust their trading.

Generally speaking, after large run-ups in stock prices, or in any market, there will be violent pull-backs. While this increase in volatility can produce some big directional moves, there may be sizable intraday swings that can catch a trader off guard.

With this in mind, how does a daytrader prepare for these changing conditions? Well, most daytraders are not in the business of forecasting market direction, but it can be very helpful to pay attention to some technical and psychological indicators that may provide a clue regarding market direction. Those indicators include price and volume, the TRIN, New 52 week highs and lows, the advance/decline line, the number of bullish vs. bearish investors, etc. A more detailed discussion regarding these indicators is more suitable for another article.

When a day trader becomes aware that the market character has changed to a bearish tone, then it is time to adjust their thinking when it comes to managing trades. First of all, due to the usual increase in market volatility, the trader should scale back position size. While it may have been reasonable to trade 1,000 shares in a stock during a bull move, 500 shares might be more reasonable in a bear move. The novice day trader will think they are losing out on a sizable profit opportunity by trading smaller during these major down moves. The experienced trader realizes that it is more important to preserve capital for time periods when the market is more predictable and less volatile.

One other issue facing daytraders during these bear markets is that the market has a tendency to have sharp intraday reversals, and there tends to be more sizable opening gaps. As some day traders actually do carry positions over night, it is a good idea to carry smaller positions over night due to the greater risk of a market reversal.

The day trader should also be aware that the overall long term market tendency is for stocks to trade higher each day. As such, even while the market is in a downtrend, quite a few trading days will close to the upside. During the current down move, nearly 40% of the trading days have closed to the upside. If a daytrader can recognize that even bear markets will pause for a breather, they will recognize significant opportunities to profit after these brief pauses when the market resumes its downtrend.

Day traders should also consider trading other vehicles besides individual stocks during bear markets. This is due to the fact that it costs the trader extra to short a stock, since they must first borrow the shares from their broker, and pay interest on those shares, in order to sell the stock short. Therefore, day traders should consider trading stock index futures, or ETFs that rise when the market falls. It is important that traders consider the cost of their trades, not just whether they make a profit or loss.

While it is definitely possible to trade profitably during bear markets, there are significant pitfalls. For many novice day traders, it may just be a good idea to sit on the sidelines and observe the market action so that they are prepared for the next bear market downturn when it comes along.

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04. Jun, 2011
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CAN SLIM

CAN SLIM is a philosophy used to screen, purchase and sell equities. This philosophy is developed by William O’Neil. CAN meaning Current Earnings, Annual Earnings, and New and SLIM meaning Supply and Demand, Leader and Laggard, Institutional Sponsorship, and Market Direction.

Current Earnings

Companies that have shown increased earnings per share (EPS) in the last quarter over corresponding period of the previous year can be good picks according to O’Neil. CAN SLIM suggest an EPS not less than 18% – 20% is desirable. However, all high performing companies showed outstanding quarter-on-quarter growth. A true speculator usually demonstrates a growth of 50% or more.

You need to confirm that earnings of companies are of good quality. You can check those figures with that of the industry. If the earnings growth in industry is solid, it confirms that the industry is thriving and company is ready to breakout.

Annual Earnings

An increase of 25% – 50% in companies’ annual earnings can be good stock picks. Wal-Mart showed an average annual earnings growth rate of 43% during 1977 and 1990.

New introductions

It is often necessary for a company to become successful if it had undergone a change. Change can in the management team, a new product or service, a new market or a new high in stock market. McDonald grew over 1100% during 1967 and 1971 when it introduced new fast food franchises.
Supply and Demand

This principle is based on the theory that keeping all other things equal, a smaller firm with smaller number of shares outstanding can show outstanding returns. A large cap company requires much more demand than a smaller cap company. Individual investors tend to invest in smaller companies as their stock price is not much directed by institutional investors. In a study conducted by O’Neil reveals that 95% of the companies exhibiting largest gains in share price had lower than 25 million shares outstanding when gains were realized.

Leader or Laggard

Although there are two companies with identical business operations in an industry, you wouldn’t show interest to invest in a company whose stock price is cheaper as it evokes your sympathy. They are market laggards. You tend to pay a premium for a market leader thinking that it will be worth in the end.

Institutional Sponsorship: A company that has 3 – 10 institutional owners is considered desirable to invest in such companies. It would be too late to buy ownership if the company has too much institutional ownership. Quality of institutional owners needs to be assessed before investing. Any bad news will drastically affect the stock price in the market.

Market Direction

It should be kept in mind that you have to go along the trend. Keeping track of market conditions is essential to be successful in the market. Watching daily volumes and their price movements give understanding of the market for a better investment decision.

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09. Jan, 2011