Bearish Action Could Set Up a Rally

 | Aug 22, 2011 | 4:34 PM EDT  | Comments
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The indices closed the day around flat but it was no victory for the bulls as they squandered a strong open and trended lower all day. They couldn't even manage to keep breadth positive and finished with about 2,500 gainers to 3,100 decliners. Gold and silver were the big winners once again and mining stocks even managed to outperform the metals a bit.

Despite the very gloomy action, I see a steady parade of bulls in the media proclaiming that the economy is not going to fall into a recession. Maybe not, but all that matters is that the market is close enough to that point to make it an issue, so that is not healthy for stocks.

The easiest thing for folks in the media to do is to tell you it's time to buy. Most of them have already committed to that course of action already anyway, and are probably sitting on some pretty sizable unrealized losses. They would love to have your company and can be quite convincing since they have already done a sales job on themselves.

I am going to stick to my very simply approach, which is to buy stocks when they are performing better. I'm not going to worry about being the hero who makes grandiose market calls at the precise turning point. It might be a good way to get attention, but it is not a consistently winning approach to the market.

We certainly have lots of gloom and negativity, so it won't take much for an oversold bounce/short squeeze to kick in. In fact, bearish action like we are seeing right now is a great setup for a bear market rally. But if one does kick in, the key will be to trade it and not trust it.

Have a good evening. I'll see you tomorrow.

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