For the first time in over a year, a V-shaped bounce has failed. The consequences are a bit more severe because market players have come to expect a quick recovery after a pullback, so many were positioned poorly for the aggressive downside action Tuesday.
Clearly, the major indices are technically broken but oversold, which may help for a relief bounce. The big question will be how far to trust a bounce. We have one failed bounce, which increases the likelihood of a second failed bounce as more bulls are trapped and bears become more aggressive.
Of course, on any sort of market pullback the media start yelling it's a buying opportunity. That is the conditioned response of the perma-bull money managers, who are always heavily long and want to make sure everyone else immediately puts their cash to work.
The bulls' hope is that the Syria issue will see some sort of resolution and the market will come roaring back. While that is possible, the market is not indicating a very high level of optimism that this problem is just going to go away.
If you are a trend-follower, there is little question that the market is downtrending and must adopt a defensive posture. That doesn't mean we don't look for bounce plays and long positions, but it does require selectivity and tighter management.
There is nothing more unproductive for traders and investors than having to make up losses. If you can avoid drawdowns, you're ahead of the game. That is why it is better to err on the side of selling than buying when the market struggles. You can always find new opportunities, but you can't always find capital. If your capital is reduced, you have a severe handicap, so it is better to focus on keeping accounts as close to highs as possible rather than roll the dice in hopes of catching a quick move.
The good news about this action is that it is producing a shakeup that will give us better opportunities down the road. If we stay patient and watchful, we'll have plenty of good trading again very soon.
Good luck, and go get 'em.