There Are No Bears Long Here

There will always be plenty of instances in trading when a bearish news release hits an asset class market and the knee-jerk reaction is a mild sell-off, followed by a price recovery, and then a resumption of the previous bull move. From a traders perspective the explanation is simple, there were no bears long to begin with to exit positions, because, well…they are bears. When obviously negative short-term news hits a market, nervous or undercapitalized bulls exit, while longer-term traders and more confident players wait to see the reaction on the close of the next 60-minute bar (or 4-hour, or Daily, or Weekly) And while there may be traders who jump in to initiate short positions as a result of the bearish news, they are generally not much of a force, which is why the trend was bullish to begin with. Bulls were already in control which generally means surviving bears have already been bloodied.  In the case of the U.S. stock market today, however we are at a significant inflection point in that we are seeing both a bearish change of direction and a shift in the bullish price pattern on a Weekly basis. Higher time frame traders, i.e.: institutional money managers may have no choice but to exit long positions in the face of a series of disappointing  economic numbers and the S&P 500 closing below 1300. The market will have made the decision for them.

In order to reverse an uptrend in an asset class market, or even cause a correction, intermediate-term, or long-term bulls — traders with both money and conviction — need to take a least a portion of their longs off, i.e.: sell. It cannot work any other way. It does not matter what bears, or analysts think. We can define an asset class market as one that either provides a yield, and/or a dividend plus ownership rights; government securities, and blue-chip stocks and bonds being examples. It is these types of markets which attract a steady flow of money from workers pay-checks every two weeks, and which become leading indicator markets. More speculative markets, such as low interest currencies or commodities will follow the asset class markets frequented by institutional and commercial investors because money, like water, is cohesive.  Shorting asset class markets is very difficult because of the steady bid provided by the working population in the form of 401K’s, IRA’s and ESOP etc, that comes into the markets every 2 weeks on payday.  Speculators who wish to become professional traders need to think like investors and understand where the strength in asset markets comes from: twice monthly investment flows tied to the payroll cycle of the majority of the population who are employed.  This is a powerful long-term dynamic at play, which could butt heads with the intermediate reality of terrible economic numbers and a break in the current bullish pattern.  A close below 1300 in the S&P’s looms…

To attend our next free webinar on how to determine market trend shifts go to: Overview of Directional Lines

Jay Norris is the author of Mastering Trade Selection & Management, McGraw-Hill, 2011, and Mastering the Currency Market, McGraw-Hill, 2009.

Trading futures or Forex is a risky endeavor and not suitable for all investors!