The stock market saw a sharp move down last week.
And it brought out all the bears, with their sweeping statements.
The analysts put the sharp down move to fears over rising interest rates.
But the data last week brought in weaker than expected inflation figures.
That won’t stoke the fire on rates at least.
I think it’s too early to start making sweeping statements about the US economy.
US manufacturing, as measured by the Institute for Supply Management, shows US industry is still expanding.
In fact, it’s more than just expanding, it’s around 14-year highs.
I’m not pushing a barrow with this.
Why you should lock in gains, take stop losses
When it comes to markets, it’s prudent to lock in gains and take your stop losses during a market correction.
I have opinions about where the market may go from here, but I don’t trade them.
I move with the market.
During a stock market correction, it’s easy to let profits turn into a loss.
In the back of the mind, there’s this feeling that if I get out, the stock might bounce back.
Well, if that happens, just get back in.
Your stops might have been taken in the recent correction.
But it’s okay to lock in profit, or take partial gains.
It prudent to exercise some caution at such times.
We trade markets in real time. It’s not so easy.
And taking your stops is what keeps you safe in the market.
But do remember, markets correct from time to time to consolidate prior gains.
It’s normal market behaviour.
And a correction like this, is a time to be watching the market.
Charts will guide you through a market correction
Look for some direction in the charts.
And focusing on the charts rather than the news, will give you the truth of the situation.
As I’ve said all year, to get a better perspective of where markets are right now, bring up a relevant monthly chart.
You could bring up the monthly chart of the Nasdaq Composite for example. It just gives you the broader picture.
And you’ll find, it’s not breaking prior support or trading anywhere near the moving average.
Yes, exercise some caution. We are getting to the late stages of this bull run.
But I don’t believe it’s the time for panic or sweeping statements, which these corrections bring out.
When the stock market is in a correction phase like this, it can be scary.
But here’s what you could be doing right now.
A market correction is the best time to build up a watch list
This is the ideal time to build up the watch list.
And observe which stocks are holding up the best, amongst all the selling.
Do a relative strength test. That is, compare the share price of a particular stock over the last month, to the relevant index.
See how an Aussie stock compares to the XJO over the past month. Or how a US a stock is tracking compared to the S&P 500 index for instance. Or, how a US tech stock is travelling the last month compared to the Nasdaq Composite index.
This is exactly what I’m doing at the moment anyway.
It’s a wonderful time to build up the watch list.
So if markets do go higher, then you’re going to be ready.
We’ve seen, this last week, that markets can turn sharply.
And that works to the upside as well.
Markets can move quickly up.
You might have been stopped out on some positions during this correction.
But this is not the time to be taking your eyes off the ball.
Keep focused on the market and continue to build up the watch list.
Despite all the experts talking about a market crash, markets could still go higher from here.
So build up the watch list, then watch the market for some evidence that it has reconfirmed it’s uptrend, in the weeks ahead.
The market had an up day on Friday, but one day tells you little.
Watch the major indices
Watch for the major indices to hold a level for a week or so, then for a big move up on volume.
But that’s not enough to say the market is looking beyond recent concerns.
Watch further for the market to bring in a higher low after that.
If it does that, then the market is telling you that it’s likely to be going higher in the short term at least.
And it can make for some good entries. Getting in on the start of the move should it eventuate.
And this is a key factor. When you get your buying right, you untangle yourself from many of those tricky holding or selling decisions.
But here’s the thing.
Buying stocks when everyone is telling you the market is going to crash, is psychologically hard to do.
Which is why I say the market is more than just charts and trend lines. You have to get past your own psychology and mindset first.
Always go with the charts, to what they’re telling you.
Forget about all the analysts with their indicators flashing red. Or, the bears calling a market crash.
And be ready to act with a strategy whichever way the market turns.
Chartist, Phil Anderson’s Time Trader
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