My lessons from the previous bear market guide me today - by Stephen M

Steve is one of the top-performing SpikeTrade Members. Last month he won so many performance bonuses that his renewal was free - with a positive balance carried over into the present month. When this Member speaks, it makes sense to pay attention - Alex E.

I learned three important lessons during the last recession & bear market.

First, I held a long position through the deepest decline and even added to it because all indicators were screaming oversold. I remember the agony as I watched it stay oversold for what seemed like an eternity. The magnitude of the push down had enough inertia to take it to depths I never thought possible.

The Second lesson I learned was during the bottoming period. People kept expecting corrections and pull backs. But here again, it was occurring during tax season, there was a lot of retirement contribution $ waiting to jump in, there was a mile long line of shorts waiting desperately to cover and last but not least, there was the Plunge Protection team busy manipulating. Lower prices seemed to be rejected when the sentiment indicators were saying they should fall lower. So for what it's worth, there is a lot of power behind this move not to mention manipulation once again by many of the same people who were present during the last go around.

The third lesson was with regards to how to jump on this train in this volatile start-stop market. It seems like those who bought pull backs to value were often worse performers and often continued to drop on low volume from a lack of buyers. On the other hand, those who bought breakouts above resistance seemed to attract the greatest buy volume from the explosive squeeze conditions. In addition, it was extremely hard to get filled at value and the markets waved goodbye as they briskly stair stepped up.

So perhaps “The Greater Fool Theory” should be redefined for this particular season in that the greater fool is one who buys below resistance vs above. I believe that – though it is contrary to value trading – it is the most consistent way to perform better in this stage of the market. I also think that this is the very reason why the sloppy amateurs do so well in this kind of market - due to their inclination to chase a stock that is breaking out and running from a short squeeze. It could also be the reason why the pros get chopped to death despite their A+ entries.

IMO, those looking for another washout could be disappointed from the shorts who need to cover and the sideline IRA $ that needs in. The Consequence?... Lower price rejection.