Stop Taking New Trades
One of the core tenets of Stage Analysis is understanding how the overall market influences individual stocks. When the overall market is under selling pressure by institutions very few individual stocks will be under accumulation where buying pressure is overwhelming selling pressure. Since even the best stocks will have a hard time gaining ground the best course of action is to stop taking new trades and wait for the correction to play out.
Stan Weinstein and Brad Koteshwar agree on staying out of bad markets. The critical mistake many traders make is trying to get more active during a choppy market and what tends to happen is both breakouts and breakdowns can fail for a while and trades get whipsawed.
Reduce Position Sizes
If you’re trying to hold positions during a correction the best way to do this is to reduce their size to take heat off your account while you’re riding out the correction. If the S&P 500 falls 10% even the best leading stocks will tend to pullback 20-30% during the correction and if you are 100% invested it can dramatically impact your account and potentially force you to sell at exactly the wrong time.
If on the other hand you reduce size early in the correction to 30% invested even if all of your stocks fall 30% you’ll only be down 10% overall in your account. That is a much more recoverable position to be in when the correction ends and also frees up cash to deploy into the next round of leading stocks once the correction is over. More than likely some of the former leaders from the previous move will not be leaders during the next cycle so having cash to deploy into the new leaders is not a bad thing.
Study: Look For Relative Strength
Stocks that hold up the best during a correction and that give back the least amount of ground and simply “base” are typically the leaders during the next cycle. What’s happening is that institutions are unwilling to unload these stocks while they are selling other stocks during a correction. This lack of selling pressure causes these stocks to just drift sideways and ignore the selloff going on in other stocks. Once the correction ends this limited selling pressure goes away and these stocks are once again under massive accumulation.
Often these leaders will complete Stage 2 breakouts or Stage 2 continuation breakouts early in the next cycle and be the biggest winners during the next up cycle in the stock market. Therefore one of the best things you can do is simply study what is going on with individual stocks during a correction because it will provide major clues as to where the big money is going during the next cycle. Market corrections give some of the best information you can find if you study price and volume during the correction.
Get more info on Stage Analysis or Stan Weinstein’s book
Check out my trading videos on Youtube
Check out my Stage Analysis Screening Tool at: http://screener.nextbigtrade.com
Twitter: @nextbigtrade
The original article and much more can be found at: https://www.nextbigtrade.com
The views and opinions expressed are for informational purposes only, and should not be considered as investment advice. Please see the disclaimer.