This is the weakest market I’ve seen since 2001-2002. Mike and I took many extended vacations in 01 as it was far more profitable to be on the golf course than trade a market that severely limited our ability to short stocks.The good news is that unlike 01 we now have the ability to trade both sides of the market. Yes, the government took away our ability to short the financials for a few weeks. boo hoo! (restrictions will be lifted on Thursday) But the amount of money available to short term traders in this meltdown is the opposite of what we experienced back in 01.
In a blog I wrote two weeks ago I talked about making adjustments as market conditions change. One of the setups I mentioned that is working right now involved stocks that were making powerful downmoves in a short period of time, 1 to 3 minutes, then were retracing to prices where I would establish a short position. This is my favorite trading setup right now. It offers the greatest risk/reward for intraday traders. Shorting a stock that is falling on the Open has worked well recently but there is still the risk of a powerful reversal in the first few minutes after the bell has rung.
Here are a few things to consider when looking for this setup. One, it is preferable that the stock was either trading in a range or moving higher prior to the powerful downmove. This is because the strong downmove is most likely signalling a new direction for the stock and is not a final panic bottom in a stock that was already trending down. Two, be more aggressive if the market is behaving in a weak fashion when this opportunity presents itself. If the stock’s corresponding futures’ contract is negative and trending lower then that is another check in your favor. Three, allow the stock sufficient room to retrace prior to establishing a short position. To often traders attempt to short a stock too close to its intraday low and are shaken out by nothing more than a typical retracement. I look for retracements between 30-50% of the current downleg for a safe entry point.