Rules of Engagement

The stock indexes have now broken down as they tumble through the support of the 50 day moving average.Many sectors have been breaking down even before the indexes started tumbling. In particular pay careful attention the financial stocks since they entered their own bear market even before the indexes started down. The chart of the S&P 500 below tells the story in a very clear format as indexes fall below the 50 day moving average which is now also starting to turn down.

Graph courtesy of http://www.bigcharts.com/

 

The rules of engagement going forward should be as follows…..

1.   Continue maintaining a list of great companies with fantastic earnings and revenue increases that are not falling with the general market. These stocks should remain close to their old highs and hence show strength. These will be the first stocks to move higher when the indexes turn up again. It’s human nature to buy the big fallers in a down turn thinking you are buying a bargain but these companies are falling for a reason, don’t get caught.

2.   Watch for a follow through day before commencement of buying. Indexes tend to get their strongest up days in a down trending market. This will sucker in unsuspecting investors before the next down draft. Just look at last Thursday’s strong up day before we went down again. What you need to see is a strong up day on volume followed by some quiet sideways action or slight pull back. Then around the 4^th to 12^th day from the recent low you get another strong up day on volume, this is the follow through day. This puts odds in your favor of being successful but of course it still does not guarantee success.

3.   After the follow through day take very small positions in companies that begin moving up from their recent consolidations. Make sure you place a sell stop so if the follow through day fails you don’t get hurt too much. As these stocks break out they will move up and consolidate again.

4.   As we move up, out of each of the consolidations you can continue to add to these positions.

5.   Money management is of paramount importance. Every time you add to your positions calculate your new break even point so you can never be in a losing position.

6.   Start selling when the stock falls below the 50 day moving average on volume.

Remember this blog site is not a newsletter that promotes stock tips or penny stocks. Rather the idea is to teach stock selection with low risk advice.