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The Best Market Strategy When The Markets Are Oversold

The month of July has been a dismal month for the bulls in the market. The downtrend occurred most of the time in the oversold condition. This makes it difficult to put on extensive short positions when the market is in that status. That is why having some short positions as well as longs is a prudent strategy. There will always be excellent short charts in an up-trending market and there will always be good bullish signals in a down-trending market. When the market conditions are such that the trend is not clearly definable, the use of candlestick signals can make a portfolio strategy easy to implement. Having the portfolio positioned with both long and shorts during indecisive periods in the market provides a format that will profit from being in some positions that benefit from the market direction with the possibility that the opposite positions may not move against the portfolio. At worst, the positions opposite the market direction should not move against the portfolio in the same magnitude as the positions profiting from the market direction. The signals indicate circumstances that move the prices in the direction indicated even though it is opposite the market direction, such as a short signal pushing a price down when the rest of the market is moving up.

This “hedge” strategy can be profitable on both sides as well as taking the risk of a surprise that will significantly move the market one way or the other. It makes for better sleeping at night.

Market Direction – This past week, we saw a very convincing bottom, a Morning Star signal in the DOW. Although there have been bottoming signals in the indexes over the past few weeks, and doing those signals in the over sold area, the bullish candle in the Dow this past Tuesday was substantial. It revealed that the buyers were stepping back into the market. Unlike the previous reversal signals, the buyers have been present for the next few days after the signal. The stochastics have now turned up, out of the oversold area. The morning star signal is an easy signal to interpret. It is a symmetrical signal to look at. It also is easy to evaluate. The last day of the downtrend usually involves a large candle, panic selling at the bottom. The next day, the bulls and the bears are in conflict, trading up and down during the day, closing right where the trading opened, a doji. The following day shows the buyers have now taken control. When the bullish candle closes more than half way up the previous dark candle of two days prior, that represents that the buyers are now the stronger force. The further the bullish candle closes up past the halfway point, the more convincing it is that the buyers have stepped in.

The Nasdaq was not as convincing immediately. Note that although it had a positive day, it did not produce a candlestick signal. This reveals that the up move may be short lived.
The next day produced a doji also, indecision still going on between the bulls and the bears. When the next day, Thursday, opened higher with the stochastics in an uptrend, that produced the buy strength to confidently start adding to the long positions.


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