Everybody’s got this backwards.
The story people carry around is that a market crashes from euphoria. Everything’s at all-time highs, everyone’s giddy, floor falls out.
You never crash from all-time highs. You crash when you’re in oversold conditions.
Are these things in oversold territory right now? Hell yeah.
And that’s exactly what should have your attention. Everybody watches for a top when things are stretched to the upside, and that’s fine, but the top isn’t the dangerous part.
The violent move comes later, once you’re already oversold and the selling doesn’t let up.
Once you’re there, no one cares about any of the fundamentals when there’s sell-side activity. You can read me the balance sheet all day. The bidless beast has arrived and it doesn’t care.
So how do you trade it?
You don’t short into holes. I say we, but traders do not short into deep holes like this. You can’t chase that kind of down move. You literally have to sit on the sideline and be like, eh.
When something is losing seven to eight percent in a day, it’s extraordinarily difficult to trade for a bounce in it. What you want is a back through. Let it rally up into an area where you can define your risk and take your shot there.
I would rather miss that trade entirely than try to hop aboard a security that’s falling this quickly.
And when it does bounce, don’t get excited. A rally back a little bit does not mean we’ve actually found a bottom. What a bottom looks like is full-blown capitulation on massive volume, and in most of these you go looking for it and find you’re not even in the first innings.
One more thing that’ll save you money.
When something is getting destroyed and you’re trying to work out where it stops, forget about the last nine months. Open up a chart for three years.
Do it with any of these high-fliers and the whole picture changes. There’s a price down there that would have looked completely normal two years ago and looks like the end of the world today, and it’s the same price.
That’s absolute hideousness on a nine-month chart and a Tuesday on a three-year one.
The bounce isn’t the thing that gets you. What gets you is what happens on the way down while you’re waiting for it.
That safety net you were told to rely on, the stop-loss order, can quietly fail you on the exact day you need it most.
That’s one of five checks I run before I put anything on. Reads in about a minute. Normally $29.97, free today.
To your success,
Don Kaufman
