As a reader of ibankcoin you’re undoubtedly aware that market looks like a thousand miles of bad road right now. There seems to be no escape anywhere except for cash and bonds (which is where I’ve parked my long term retirement accounts based on the seasonal investment strategy).  As many astute traders have mentioned already, the stubborn bulls are – ironically – keeping the market from finding a tradeable bottom. In most cases a flush/capitulation event is what will put the floor under the market (even if short term). So far we’ve had the painful slow drip, which is in many ways analogous to the old anecdote of a frog slowly being boiled to death.

Markets like this emphasize the importance of having a plan for each of your positions and sticking to it. Don’t be a frog. If you aren’t disciplined and continue to just give it another day, you’ll quickly find yourself with large loss, wondering ‘how could this have possibly happen?’ and  – to paraphrase Blake from ‘Glengarry Glen Ross’ (if you haven’t seen it yet, rent it tonight!) – ‘sitting around in a bar: ‘Oh yeah, I used to be a trader. It’s a tough racket.’

Remember why you were in the trade to begin with and stick to your plan. If you entered the trade based on a ‘good looking chart’, don’t forget to exit based on the chart as well and don’t let a trade become ‘an investment’ (sadly, I’ve done that myself many a time, but I’m getting better).

But back to the Titanic update. There was a lot of disbelief and talk about ‘crazy voodoo breadth signals’ (mostly from my friends who think this whole breadth research is a load of crap) when I first shared the results of this research, however those who haven’t considered it now certainly wish they had. Take a look at the updated chart and see for yourself. And to be completely honest and fair, I haven’t taken advantage of this ‘Titanic syndrome’ call nearly as much as I should have. While I made some money on the short side and saved my long term accounts from this disaster, it was really but a fraction of what it should have been. It was the first time I calculated it and saw it play out in reality, so I suppose next time I’ll trade it with a lot more conviction.

And as horrific as that looks, keep in mind that DOW is only 5.39% off 4/4 close, while other major indexes fared much worse.

SPY down 7.24%, QQQ 9.64%, IWM 8.85% (that’s from 4/4 close, numbers are slightly worse from 52wk highs)

The question that is on most traders’ minds at this point is – where do we go from here? Well, unfortunately Titanic Syndrome doesn’t specify the maximum drop target (I wish it were that simple), but it does state that the typical drop is at least 10%. We are just about there at this point (at least on some indexes). There’s the question of a H&S pattern on SPY, which calls for a measured move of low 1280-ish, so we are nearly there as well (say, another 1.1% down or so). There is, however, more in the ‘bad news department’ as we just had a ‘Dow theory sell signal’ as reported by Stock Trader Almanac group, which may suggest that the worst is yet to come.

Also some of the breadth signals I track have gone from ‘Buy’ to ‘Strong buy’ over the last couple of days. However it’s important to remember that any long trade at this point would be going against the trend, and therefore will carry a much higher amount of risk. So far I have said ‘tomorrow’s the bounce day fo’ sho!’  several days in a row and have been obviously wrong (keep in mind that I meant a ‘relief bounce’, not another leg up just yet).

As many experienced traders note in their rules, it’s correct to be neutral or bullish in an uptrend and it’s correct to be neutral or bearish in a downtrend. So what’s a trader to do? That really depends on your trading style, personality and risk tolerance. If you try to catch every intermediate top and bottom and ‘milk the mother market for every drop she’s got’, you might start initiating long positions thinking that the bounce is near and a snap-back relief rally (which could be quite viscous as shorts pile in to lock in their gains) is just about to unfold. If that isn’t your style and you prefer a sold base before you commit to a trade, then cash continues to be king and a valid position in times like this. Remember that election year seasonality in May is bearish right through the end of the month and so far this year it’s played out perfectly. Also remember that market breadth is a valuable tool and really paints the picture of what the collective participants are doing (as opposed to thinking, pondering, considering while they answer sentiment surveys). It will tell you when to step out of the market as well as when to be ‘take a 2nd mortgage on the house’  aggressive. (FB IPO wasn’t one of those occasions – there’s the mandatory mention of Facebook for today).

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