If you didn’t notice … yesterday was an extremely critical day for the markets.
After more than a month of melting up, the major indexes hit a major rejection yesterday.
The S&P 500 ETF Trust (NYSEARCA: SPY) was down as much as 1.5% as the chart butted up against its 200-day moving average — coinciding with the all-important $400 level — and failed.
Additionally, protests in China over the weekend — at Apple Inc.’s (NASDAQ: AAPL) Foxconn plant — put pressure on the entire world economy heading into this week.
It looks like the bears are finally starting to come out of hibernation.
And as the market trend shifts, your trading strategies need to change as well.
After all, the markets are cyclical. Trends come and go.
If you get married to a pattern or a position — like a certain character in a story I told yesterday — you’re dooming yourself to failure.
You may be wondering … why am I bringing this up now?
Because the market could be gearing up for a major trend reversal to the downside.
And if you aren’t ready for it, you’ll get smoked.
But if you’re prepared when opportunity strikes, you could potentially make a fortune.
Keep reading and I’ll show you how…
Listen to What the Market is Telling You
When a big trend reversal takes place, there are always some traders who get caught flat-footed.
They don’t see the reversal train barreling towards them and fail to get off the tracks before it’s too late.
But there’s an easy way to avoid this … listen to what the market is telling you.
The stock market has a personality. If you pay attention (and know what to look for), it’ll send you clear signals about where the price action might be headed.
Here’s what I’m watching for:
- Volume. So far, the selling volume hasn’t been as large as the buying volume. I’m looking for a big-volume red day for the confirmation of a trend reversal.
- The SPY’s $400 level. If the SPY can’t get back above $400 soon, that level will start to act as resistance, making it more difficult for the chart to exceed it.
- Major trendline breaks. If you connect the lows or the highs on a daily chart, you’ll be able to see the overall trendlines. I’m waiting to see if the primary uptrend (that began on October 16) breaks in the next week.
On the same token, don’t fight trends!
If the major indexes stack a few more red days together, it’ll be hard to ignore that bullish momentum is dying out.
At that point, if you’re still buying calls, you’ll be ignoring the trend and setting yourself up for disaster.
Trading is a game of flexibility. Always be prepared to switch things up when the market conditions are shifting.
Evolve Your Trading to Fit the Moment
You’ve gotta constantly adapt and evolve your game plan if you wanna survive in the stock market.
An unwillingness to admit your setup has stopped working will probably lead to major losses.
This is especially true for my strategy, which relies heavily on following the hype in hot sectors.
A sector can be hot one week, only to go ice cold and gap down the following week.
Here’s an example: As geopolitical tensions mounted earlier this year, the energy sector went parabolic.
Makes sense. A supply shock caused a demand increase. Simple economics.
That said, a lot of traders got caught chasing the highs in oil stocks while the better play (in my opinion) was attempting to short the top.
The same thing happened with Bed Bath & Beyond Inc. (NASDAQ: BBBY) back in August.
As the stock’s epic short squeeze rolled over near the $30 level, many traders failed to realize the top was in.
In just a few days, their call premium evaporated to zero … while anyone who bought puts at that level made a killing.
Those in the first category failed to adapt, while traders in the second category identified the trend reversal and took advantage of it.
The difference in these sample paths is massive — you could make a home-run trade or blow your entire account up.
If you’re gonna have a long and successful career in the stock market, you can’t be rigid.
You must be willing to adapt to any market conditions. Toss out tired setups as soon as they stop working.
Listen to what the market is telling you and evolve your strategy to fit the moment.