Storm Watch

Predicting a major correction is actually very simple. Just watch the aunties, uncles and students. Once they start discussing them with deep interest, or boasting of sure win stock picks or big earnings in the market, its a sure sign the storm is around the corner. The question is when you want to find shelter before the rain starts falling.

Just look around the news. There are still talk that this is just a small blip and recovery will be soon. People just don't get it. As long there are still such talk, market will continue to tank. Wait until such talk has disappear and people have resigned to the fact that this correction will be here for quite awhile, only then the market will recover.

In doing TA, we cannot use our belief to forecast on where it is going. Just because there is a support somewhere does not mean it must be heading there. So need to establish the evidence first that it has to either head up or head down, and then use support and resistance to forecast where it might be reaching.

Rebounce is expected. Nothing will go down in a straight line. With so many down days, rebounce is just a natural event. Market always open based on the perceptions of amateurs. Market always close based on the perceptions of professionals. It pays more to follow the professionals. People need to remember that the professional managers trade against the retail investors. If they are trading against you, do you think they will tell you exactly what they are doing?

On the bounce that often occurs following a drop: after the bounce, the market drops again, making those who bought the bounce unhappy, and those who got left out happy. Then a counter-rally ensues, which often exceeds the high of the first bounce. This succeeds in bringing in buyers on the sidelines, and followed by a resumption of the downtrend.

In 1929, the Dow peaked around 380. On week 2, there was a chance to cash out at 370 (before a drop to about 325). On week 6, the average had rebounded to 355, before a huge drop to 235 and ultimately about 50! In 1987, the Dow reached just over 2700. On week 3, it reached about 2600. On week 6, it bounced up to about 2650. After that, it was bombs away to around 1750.

Is the Bear fair... YES. It always gives you a second and sometimes a third chance to exit at reasonable levels. If the top has been reached, then the 50 day M.A. should be our first chance. The 50MA seems like a good exit point.

Do a proper asset allocation plan and just do your DCA. That's the best I can recommend without knowing exactly the profile and strategy of each investor.