If the market starts to fall out of bed and I think it very well might be doing that in the near term, we are going to have to start going short.
Although not half as many people play short as go long, that's a sin and if you're one of them, "stop it!" There is nothing morally wrong with shorting, it's not anti-American, heck, it's not even anti-stocks.
It's just a tool.
But just like going long, we are going to have to read the road maps.
Just like when we are playing to the long side and we use upper resistances as "roadblocks" we must get past to start a position, on the way down we have to watch the support levels.
That means technical analysis to some extent and this is a touchy area.
Some people will swear on a stack of bibles that the market follows technical guidelines to a "tee".
Others will tell you it's an advanced form of Voodoo.
I am in the middle.
Buy and sell programs are often based on presentable technical levels, and therefore important.
But as I've always felt, the best chart in the world will lose you a ton of money that day if say, the country was attacked.
In other words, they are a tool, not the "final word".
When we are looking to go long for a trade, I generally use a 6 month chart.
Why? Because in my perspective, they give a nice pattern recognition, and mini breakouts are often present that you would see on say a one year chart.
But this is the concept I call "layering".
In basic terms, you could make the argument that you could find a mini breakout on a one day chart, a one week chart, one month, three months, 6 months, 1 year, 2 years, all the way to 20 years.
To get an idea of just what the heck we mean, let's say a stock was $40 and the bear market hit.
It paused at $30 for a month, paused at $25, twenty, and so on down to $10.
On the way back up, a 6 month chart would probably show me a "breakout" when it crossed the $20 level.
It would show me another maybe at $25.
but, I might have to expand my horizon to a year to see the $30 level and who knows, maybe 2 years to see the $40 level.
In other words there are "breakouts inside an overall wider chart picture".
This has to be taken into account as the market falls also.
A stock might be falling, and on the 6 month chart we see that if it fails say 50 bucks it's probably has no support until it hits 42.
So, we take the short, it falls to 42 and bounces a bit.
Then it's fades back to 42.
Now, we might have to expand our chart to a one year, to see that the next level of support is at 35, that would then be the most probable area it could fall to.
Some people say, "why use the 6 month and not just go to one year or more? Again, I think you lose sight of the 4 and 5 dollar support and resistance levels a 6 month chart give versus a one year chart.
It's just more "defined".
So, as we start our search for short ideas, remember I will be suggesting them on stocks about to lose some form of support on a 6 month chart.
Compared to a one year chart the move might seem insignificant, but we've found it to be pretty accurate for us.
The shorter term charts seem too confined and the longer term charts seem too "congested" for our tastes.