Ugly Market Days and How to Handle Them

“Defense is the best offense on days like this.”

I said this Wednesday during my Daily Double Down webinar.

We were in the midst of a very nasty market day. 

By the end of the day, the NASDAQ had fallen 3.6%, its worst day since 2022…

And the S&P 500 and the DJIA didn’t fare much better, sinking by 2.3% and 1.3%, respectively.

Much of this slump stemmed from two factors: lower-than-expected earnings from Alphabet Inc., aka Google (NASDAQ: GOOGL), and Tesla Inc.’s (NASDAQ: TSLA) fourth straight quarter of disappointing earnings. 

As a sympathy move, the Magnificent Seven, Microsoft Corp. (NASDAQ: MSFT), Apple Inc. (NASDAQ: AAPL), Nvidia Corp. (NASDAQ: NVDA), Alphabet Inc. (NASDAQ: GOOGL), Amazon.com Inc. (NASDAQ: AMZN), Facebook (NASDAQ: META), and Tesla Inc. (NASDAQ: TSLA), collectively lost 6.1%.

This Barron’s headline from Wednesday described it best:

To add salt to the wound, former New York Fed President Bill Dudley recently said the Federal Reserve should cut rates in July.

Yes, on the surface that sounds good since we’ve been chomping at the bit for the Fed to start lowering rates… 

But in this case that statement had the opposite effect. It lowered market sentiment since it raised questions about whether there’s a hidden weakness in some part of the economy that we’re all missing.

The Fed can’t win, no matter what comes out its mouth!

However, there was a bright spot in all of this…

Despite the dismal market situation on Wednesday, our proprietary algorithmic system, Oracle still delivered two big winners for us.

Bone Biologics Corp. (NASDAQ: BBLG) gained 62.45%* and Dermata Therapeutics Inc. (NASDAQ: DRMA) returned 66.11%*, both after hitting their green Oracle signals.

If you don’t know what Oracle is, you should! I use it every single day and I couldn’t trade without it.

Oracle scans the entire market every morning, looking for price patterns and trends. Then, it applies its algorithm to create a list of 20 stocks it sees as potential gainers that day. 

That stock list also includes a green (buy) or red (short) entry price so you know exactly when to get into the trade.

Learn more about Oracle here to see if it’s right for you. 

So, why are we even talking about this depressing market scenario? 

Because every trader needs to know how to handle days like Wednesday.

After all, and I also said this in my Daily Double Down, “It’s not the money you make in trading. It’s the money you keep.”

Markets go through cycles, and sometimes we find ourselves in bearish territory. But don’t worry, down markets aren’t the end of the world. 

Sometimes, they even give us unique opportunities if we know how to navigate them.

First off, adjust your mindset.  

Many people panic when the market starts to dip. Fear can lead to poor decision-making and impulsive moves. 

Instead, approach a down market calmly and strategically. Embrace the challenge!

Every trader needs a well-constructed trading plan to be ready when a down day, or days, arrives.

Do you have a plan? If not, read my article, which shows you how to build one.

Short selling is a possibility, but only for experienced traders.

I’ll talk about short selling first…

It can be a great strategy in a down market, but NOT if you’re new trading. 

Don’t forget, short selling isn’t for the faint-hearted. It requires a solid understanding of market trends and timing. Have a plan and set strict stop-losses to protect yourself from sudden spikes.

One of my recent blog posts talks about short selling. Click here to learn more about it.

Focus on quality stocks.

In a down market, not all stocks will be affected the same way.. 

Higher quality stocks, those with strong fundamentals, robust business models, and healthy balance sheets, tend to perform better. They might still decline, but they often rebound more quickly and more powerfully than weaker stocks. Focus on these stocks for your long positions.

In fact, if you love to trade what I call “real” stocks, down market days can provide a great dip buying opportunity for you.

But remember, none of the above applies to pennies. These are a different breed of stocks that trade very differently from “real” stocks. Don’t ever try to guess the bottom on a penny stock.

Look for oversold conditions.

In a down market, stocks often become oversold, creating potential buying opportunities. 

Be sure to use technical indicators like the Relative Strength Index (RSI) to identify these conditions. For example, when a stock’s RSI drops below 30, it might be oversold and due for a bounce. 

However, never ever rely on just one indicator. Combine it with other signals and conduct thorough research before making a move.

You definitely need a solid trading platform in situations like these…

If you don’t have one already, my top choice and the one I use daily is StockstoTrade.

It has dynamic charts, technical indicators, stock screening capabilities, and a selection of add-on alerts services, so you can stay ahead of the curve.

Register for a 14-day StocksToTrade trial today — it’s only $7!

Protect your capital.

Be cautious with your trades and don’t take any unnecessary risks. 

Use stop-loss orders to limit your downside and consider reducing the size of your positions. It’s better to make smaller, consistent gains than to take large losses that can set you back significantly.

Stay informed and be adaptable.

Markets can turn on a dime, especially during downturns. 

Stay informed about economic indicators, earnings reports, and news events that could impact the market. Be ready to adapt your strategies based on new information. 

Leverage bear market strategies.

Consider using specific strategies designed for bear markets, such as buying inverse ETFs, which move in the opposite direction of the underlying stock or underlying index. These can be a good, lower-risk alternative to short selling. 

For example, take a look at Alphabet Inc. (NASDAQ: GOOGL) on Wednesday after it announced earnings…

Not pretty, I know.

Now, take a look at the reverse Alphabet Inc. ETF, Direxion Daily GOOGL Bear 1x Shares (NASDAQ: GGLS) during the same time period…

It moved in the opposite direction, hence the name “Reverse ETF”.

And don’t forget about options strategies, like buying puts. They can help you protect your position and profit from downward movements.

Remember that options are also great alternatives to buying expensive stocks that are usually inaccessible to traders with small accounts. 

If you’re interested in trading options and want to learn more, you should subscribe to our IRIS system. 

As part of the program, we provide options training, trade ideas, and everything else you need so you can feel comfortable doing it on your own.  

Learn more about IRIS, our proprietary AI-powered trading system, right here.

Keep an eye on the long term.

Down markets can provide great buying opportunities for longer-term investors, like swing traders. 

On down days, like Wednesday, look for strong companies with solid growth prospects that are now available at discounted prices. These investments can pay off handsomely when the market recovers, be it one day or several.

By the way, if you don’t know what swing trading is, it’s the sweet spot between day trading and long-term buy and hold investing.

Learn more about it in my video.

My final thoughts.

Trading in a down market requires a strong trading plan and a calm frame of mind.

If you’re an experienced trader and you’re ready to short trade, consider it as a strategy. 

For everyone else, focus on quality stocks, and look for oversold conditions. Protect your capital, leverage bear market plays like reverse ETFs or put options, and stay informed. 

Wednesday was ugly but we came out safely on the other side… And in fact, the markets were up just a day later. 

Just remember, another Wednesday will come. Stay educated, be prepared and view it as a potential profit opportunity.

 

Have a great weekend everyone. See you back here on Monday. 

 

Tim Bohen

Lead Trainer, StocksToTrade