I am prepared for the worst, but hope for the best. -- Benjamin Disraeli
Over the past week the market has fallen into a downtrend pattern. We have had two severe bouts of selling followed by two oversold bounces. Both lows and highs have been lower, which is the definition of a downtrend.
At this point, there isn't any reason to believe that the downtrend won't play out further. The bulls will try to offer some fundamental reasons about why things aren't that bad, but the price action is telling us that there are plenty of things to worry about. Europe has issues once again, the sequester is about to hit and Ben Bernanke isn't offering any great comfort.
When the market is struggling, there is always a very loud group of folks who will try to push you into stocks. Many people on Wall Street believe it is their job to always promote stocks and that any weakness it is a buying opportunity. A group of permabears do just the opposite when the market is trending up, but the bulls are a much bigger and more vocal group. They always do a good job of urging you to jump in so you don't miss out on the massive rally that is just around corner.
Following the pullback, we've seen a number of stocks have come down and I wouldn't mind being a buyer. But the problem is that I want to buy stocks when they have the best chance of enjoying a sustained uptrend and not just a short-lived bounce. Right now, market conditions suggest that the market has not yet hit a bottom. It may add to yesterday's bounce, but there isn't any reason for us to believe that it is about to turn and head back up to the recent highs. The media will try to convince you that everything is just fine, but we need the price action to prove it.
The type of action we are seeing now always makes me feel more optimistic. I know that eventually the trading setups will develop and we will actually have plenty of stocks to choose from that are no longer extended and in need of consolidation. The key is staying patient while the patterns are developing and then being selective as you start accumulating.
The most important thing you can do right now is work on shopping lists, so that you are ready to act as market conditions eventually improve. Don't jump the gun and start loading up too quickly, but make sure you are tracking the names you like the best and are ready to pull the trigger when they find support and start to develop more attractive patterns.
For many traders it is actually a great relief to finally see some downside action. Traders always have a hard time producing superior results in one-way markets. They need ups and downs in order to outperform, so it is nice to see what many would consider to be more normal action for a change.
We are seeing a very quiet start again. Ben Bernanke makes another appearance and there will be chatter about Apple (AAPL), Europe and the sequester. Keep your eyes on recent lows as the bears will be pushing hard for another lower low.