One of the great things about bull markets is they often will bail a trader out of making a mistake. If entry points aren't perfect or stock selection is suboptimal, a strong market will minimize the negative impact.
Bear markets tend to be much less forgiving.
Typically, the moves in bear markets are bigger and faster, and if you are on the wrong side of a trade then it is a mistake to just hold and hope that the market action will save you. It is extremely easy to let a short-term trade turn into a miserable long-term hold.
Bear markets are usually of much shorter duration than bull markets. Also, one of the positive things about bear markets for traders is that the biggest bounces always follow the biggest losses. Traders can make a good living simply by trading countertrend bounces in a bear market.
There is no question that we are currently is growling grizzly bear of a market. It is so ugly that it is actually setting records. According to Sentimentrader.com, five times in the past seven trading days, ninety percent of the stocks in the S&P 500 declined. "This is the most overwhelming display of selling in history," Sentimentrader.com said.
This very broad selling is likely a function of structural changes in the market, such as using ETFs as a way to gain short exposure. When someone shorts (QQQ) , they essentially short all 101 stocks that currently are in the Nasdaq 100 index. There is no stock picking.
One of the hallmarks of bear markets is that fundamentals simply don't matter that much. Stocks decline in a more correlated way, and valuation doesn't matter. When the market finally does start to recover, there will be much more focus on picking the best stocks that have been punished the most.
After the pounding of the past week, the market is ready for some sort of oversold bounce. There is some green on the screen, but buyers are understandably lacking a lot of trust. This recent action has caused some real pain, and many folks just want to escape.
We have a three-day weekend coming up and Friday is triple witching when options and futures expire, so there is an extra dynamic this time. Do market players want to risk long exposure over a long weekend when there are so many potentially negative headlines that might hit?
The key right now is to watch how well the strength holds up after the opening bell. The longer it holds, the more likely it will start to create some fear of missing out, and that will push things higher.
Nevertheless, it is paramount to keep in mind that all we are looking at right now is a countertrend bounce. This is still a bear market, and it is likely to last for a while. This is not the time to load up on long-term positions. That time will come when the technical action improves.
Do not allow yourself to be sucked into the bottom-calling game. Calling the bottom is not an effective strategy.
