Lessons  Learnt  With  Market  Correction

"On some level, our goal as traders is to make as much money as possible when it's EASY to make money, so that we can stay on the sidelines when it's HARD to make money"

By Yvan Byeajee - Trader

Market topped out on Feb 19th after having made a consistent slow and a steady run for 18 weeks along the 10 day sma (simple moving average).  All hell broke loose on Feb 20th.  $SPY and $QQQ  just sliced through the 50 day sma within 3 sessions.  Lot of retail traders were just stunned into inaction.  In the following  4 trading days, both the indexes plunged down vertically to the 200 day sma.

Ouch !   Ouch!   Ouch!

I had gone away for two weeks in February to Mexico and I too was caught off guard with this sudden move.  The indexes were telling us a very clear story with 8  "Distribution Days"  piled up within a week between the  $SPY  and the  $QQQ.  I have been leading 3 of the IBD (Investors Business Daily)  monthly Meetup groups in the Tampa Bay area for the last 6 years where I share my observations of the markets during our monthly meetings.  Some of the lessons that I have shared with them when market rolls over into a correction territory are:

1. It usually takes just 3 to 5 trading sessions to bring the  $SPY  and the  $QQQ  from its top all the way down to the 50 day sma.  Monitor daily what these 2 indexes are doing. 
2. Growth Stocks tend to move down 2 to 3 times faster than the general market does when it goes into correction.
3. Utilize the 34 day ema (exponential moving average) as a line in the sand to mitigate losses from market correction.
4. Always have a Trade Plan in place before executing any stock position.  Plan for a loss of no more than  6%  to 7%  from original entry.  Have a plan in place to harvest some profits when it reaches  +20%  to  +25% from entry.
5. Keep your mind focused on the stock and Index charts and not the news or how you feel about the market.  Market is designed to fool you.  
6. Be neutral in your thinking and observe what the market is doing.  It's not important to know why.  Leave it for the self proclaimed market GURUS that write columns and show up on tv shows.  They are not here to teach you and make you money.    

Market   Performance

In took 18 weeks for the  $QQQ (leading growth stock index) to gain  +24%.  All that was given up within 16 days of the market correction.  It's critical that we all learn a lesson from this and never give back all the gains made in the market during it's bullish run.  The last time we had such a correction was last year right around the Christmas holidays.  There comes a point when the institutions stop liquidation and recognize the beaten down stocks.  Their strength of $ volume of their buys creates the strength in the market.  We had such a day last Friday when both the indexes jumped up  +8.5%  in price.  The only negative was that the volume did not exceed the selling volume from the day before.  We need for the  $SPY  and the  $QQQ  to continue to move up in price with volume strength.  We could have a  "Follow Thru"  day  if we get a total of 4 days of attempted rally in the market in the next 10 days.

Currently  the  $SPY  is  13%  below the 200 day sma but the  $QQQ  is only  5%  below the 200 sma.  Leading sector  $XLK (technology sector) is only  1.23%  below the 200 day sma.  That is where one ought to be looking for opportunities when we get a   "Follow Thru"   day.  Market has exhibited stomach churning volatility in the last 3 weeks.  Both these indexes have been moving up or down by  8%  to  9%.  It's prudent that the retail investors start out with a very small position - maybe 15% to 20%   of the full position  -  to test out the market when the market goes back into a confirmed uptrend.  This will help one mitigate losses, should the market turn against you from the extreme volatility.  It's likely that the first couple of  "Follow Thru"  days may fail.  There is a lot of technical damage done to the stocks and it will take a while for some of the leading stocks to build a proper base.

Good luck this week and Happy Trading!

Amin