Wednesday's 800 Point Gorilla: What Comes Next?


Note from Allan: I sent this out to my Blue Line Trading Subscribers on Wednesday, with the market down "only" about 200 points. The market closed down over 800 points and it's taking no prisoners. Best of all, it's only the beginning.


The breakdown across major stock indexes today suggests that there will soon begin a spate of Sell Signals both in indexes, ETF's and individual stocks, most of which have been in uninterrupted bull markets for almost a decade. Yesterday, we pointed out previous exceptional gains in MSFT, AAPL and SPY earlier this year, all on respective Buy Signals while in major uptrends. A bear market or even just an extended downtrend will lead to just as many and as large of gains in puts.

We have waited a long time for the bull to turn to bear and this is as close as we have been to that transition since the inception of this trading service. No matter what has happened with our trading in the past, it is the now, and what happens next that is all that matters. 

Our trading system identifies trends and then takes positions in the new direction upon each successive price retracement. That means that the first of those Sell Signals will come after an initial leg down. We have already seen examples of what happens both in established downtrends (EEM) and portfolio stocks that transition from bull to bear in a matter of days (FB).


used these two examples because they represent how once a bear trend begins there are multiple opportunities to get in and how well these signals can pay out. We started this trading strategy at the end of q bull market, making for a choppy environment to be buying options. This was worse kind of trend and as a result we suffered many more failed signals then our backtesting indicated. That is because the backtesting was done in the heart of a bull trend and our first few months of signals were at the transition from bull to bear. 

Breaking below longer term bull channels rings out the bull and rings in the bear. EEM and FB exemplify what comes next. If the market is embarking on an extended decline we are going to make a lot of money. System trades or not, I'll be back with some initial short trade ideas - but first, let's see what happens going into the close.

"You're either on the bus or off the bus.” - Ken Kesey