As the indexes begin to look increasingly bearish as the weeks go by, it’s important to keep in mind that many of the same principles that keep you profitable in a bullish market will serve you well in a downtrend.
A great tip for newer traders is to look at the inverse charts of the current indexes (to look at inverse charts, just enter a minus sign before any ticker). Looking at the inverse charts will likely be more “familiar” as the inverse of the indexes looks bullish.
Looking at the inverse chart of the QQQ above, while it looks bullish, it is far too extended to get aggressively long at these levels. In an uptrend, we would wait for the next dip to the 21 exponential moving average (EMA) before getting short.
Taking that same principle, when we look at the actual QQQ, though it’s bearish, it is far too extended to the downside to place a good short here. With that being said, we are looking for bounces early next week, ideally into the 21 EMA as our next opportunity to enter a low-risk, high-reward short.
Since volatility is what brings the market down, we’ll need to see the Volatility Index (VIX) flush back to its own 21 EMA next week to give the indexes a chance at rallying. If the VIX – some call it the “fear” index – can in fact fade to the downside, we’ll be ready to enter some shorts on the indexes. We’ll be watching for a break under the recent lows into February and March.
So long as the structure is bearish, we’ll be looking to play the “ebbs and flows” of the market in the path of least resistance.
Stay Focused!