Downtrends develop when market bounces fail, and prior lows are undercut. When that occurs several times, then we have a downtrend in place.
That sort of action is occurring Wednesday, but there has been a feeble effort to hold. Breadth is running close to flat, which isn't bad, but there are plenty of small-cap stocks that are drifting lower primarily due to a lack of interest.
The easiest mistake to make in a trading environment like this is to average down too big and too fast into favorite names. There is an inclination to believe that these are solid companies, so they can't possibly go much lower. However, it is amazing how far something can drop when there is poor market action.
I like to build positions in favorite stocks in a poor market like this one, but if a position continues to sink further than seems reasonable, my response is to sell some and then look to rebuy it later. The normal emotional response is to keep adding to it since it is such a great bargain, but as the position grows bigger and the poor action continues, the risk of an emotional reaction increases. When a position is too big, the likelihood of a panic sale increases fast.
I want to manage my risk and be in a position to buy more aggressively at a later point when market conditions are better. The important thing is to not be too hung up on the possibility of rebuying at a higher price.
I am targeting a number of names like that right now. Two that are acting particularly poorly are Performant Financial (PFMT) and Butterfly Network (BFLY) . I am confident that they will eventually do well, but I don't want to build up a large position too quickly. I've made a few sales as they have dropped but now feel confident taking larger positions if and when they start to act better.
While this kind of market action can create some great opportunities, it also creates the risk of finding yourself buried in a stock that can't seem to find support. The best move is to reduce your position and then watch for new entry points. Whether they are higher or lower doesn't much matter.