Are we headed into another Great Depression?

The question that runs through many Traders, Investors, and Fund Managers minds lately has been “Where is the market going”? The reason for ever-ones curiosity is to have a better sense of what to do with their current investments or sideline cash. If you are unsure about what to do, cash is sure. Meanwhile all the Super-Stars, Celebrities, Money-Managers, and Hedge Fund Managers are sitting around counting their shillings while the little guys suffer and feel they have missed the rally or they didn’t seize a certain opportunity at some point in the last six to eight months. I would like to point out a few items via charting examples in order to have a better sense of where the market will potentially head. Then I will delve into some simple fundamental statements about the economy. Mark Twain said that the markets don’t repeat themselves but that they rhyme. I want to demonstrate that by taking us way back to the great depression and doing a comparison/contrast of what the charts looked like in that time period and what they look like today that this will give us a good indication of what the markets may do starting in January.

Near the bottom of this article is the Comparison CHART[ad]

The areas that are circled are the comparisons, see how they match each other in a similar way. One main difference is that the plunging of our sell-off didn’t start until about one year into the bear market whereas in the Great Crash it happened almost overnight. Either way we have declined about the same percentage amount. If the rest plays out to match the 1930’s we could see the Dow 2000’s. I hope that never happens but the reality is that we are in a really bad economy not just in the United States but globally speaking! This makes the market a traders market and a great place to learn to trade and profit from the volatility.

Like any sports star that took years to figure out how to bat the ball, make a 3 point shot, or kick a field goal, trading and investing also takes a hundreds of hours of practice. The sports industry has produced a number of successful traders and investors. To name one, Pete Najarian, the Pit Boss, is ranked one of the top 100 traders by Trader Monthly magazine, is co-founder of optionMONSTER.com, a news and information site for options traders. Following a football career that included several seasons with the NFL’s Tampa Bay Buccaneers and Minnesota Vikings, Najarian took up options trading in 1992 joining his brother, Jon ‘DRJ’ Najarian, at Mercury Trading, a market-making firm at the Chicago Board Options Exchange (CBOE). Two years later, he assumed responsibility for Mercury’s risk and arbitrage and later led its entry onto the New York Stock Exchange (NYSE). (quoted from http://www.cnbc.com/id/18945714)

There are others that failed at the game. Lenny Dykstra being one of them. Dykstra played for the New York Mets during the late 1980s before playing for the Philadelphia Phillies during the early 1990s. He threw and batted left-handed and played primarily as a leadoff hitter. (quoted from http://en.wikipedia.org/wiki/Lenny_Dykstra) In August 2009, Dykstra was living out of his car and in hotel lobbies. He owes more than $30 million to investors of which he lost all their money in the market crash of 2008 and beginning of 2009.

One strategy that is used by traders to avoid catastrophe in unknown waters is one that I will describe below. This is not a majeur force strategy just a way to earn some income in the markets while being indecisive about going all in with your sideline cash and investing for the long haul. Until all this mess with the economy blows over , you will want to wait for big-sell-offs of various equities especially in the over-bought emerging markets such as China. Currently there has been a large sell-off in Chinese ADR’s listed on the american markets and they have presented some good buying opportunites fundamentally (numbers) and technically (charts) speaking.

Below is a written out version of part of my strategy which works extremely well in this market.

These companies that I have researched, traded, and invested in have been outperforming the market on a day-to-day basis. Even when the U.S. markets are down, my account will remain flat or even go up because of the resilience of these companies. Many of these equities have a “low float” (a low number of shares outstanding), precluding that whenever a flood of buying occurs, the stock soars or vice versa the stock tanks on selling, a lot faster than an equity with a large number of shares outstanding, such as existing U.S. companies that are listed.

Value-Growth Chinese companies are relatively undiscovered, and once investors realize what potential future growth they have, they will be drooling at their low PEs and beautiful fundamentals and piling in. I would be cautiously optimistic allocating only 35% of my portfolio in China.

I have a dynamic watch list, 13 trading rules, and a training video that I give out for free at www.csquaredtrading.com, but the most important part is the strategy that I have developed with a partner over the last ten years in order to trade in and out of these volatile and uncertain markets accurately. Without this, you fellow trader and investor, are merely shooting in the dark like a midnight cowboy as you trade. Even if you are investing, this will help you create a margin of safety on your purchases. This is where a sports fanatic can relate as it ties in to having an edge in what you do. Has somebody ever covered a topic or a problem and never handed out a possible solution? Well I have outlined just a few things below to keep in mind when purchasing or selling a stock.

A million-dollar-banker buddy of mine used to purchase stocks he liked at whatever price. Now he calls me to verify a good entry point on a company that he loves! The strategy is named the Triple-Whammy Trading Technique. Below is a description of a piece of the puzzle and how it works. (Remember there are many other moving parts to the market and this is just part of the many tools required) You may need to do a bit of research to figure out what some of these words below mean.

(Important Note: The Triple-Whammy Trading Technique only works well if the direction of the Bollinger Bands is primarily from left-to-right, rather than primarily up or down)

Set up your chart: Make your chart-settings as follows:

(1) Time Period: For day trading, 30 minutes or one hour; for swing trading, 3 days or longer
(2) Chart Style: Candlestick
(3) Chart Frequency: For day trading, one minute; for swing trading, 10, 15, or 30 minutes
(4) Upper Indicators: EMA (9 period) and Bollinger Bands (20 period)
(5) Lower Indicators: MACD (12, 26) and RSI (14)

Now you’re ready to proceed.. There are three essential components of this set-up:

For quick profits with a Triple-Whammy Perfect buy (Buy-Low-then-Sell-High; or Buy-to-Cover Short-Sell), these three legs are as follows:

(1) The candlesticks will violate the lower Bollinger Band.
(2) RSI must fall into oversold territory, under 30, and preferably in deeply oversold territory, under 20.
(3) The MACD (blue) line must be under the signal (red) line, and falling; and then must turn back upwards and cross the signal line. The crossover is the final confirmation — but if the turn upward is sharp enough, you know it’s getting ready to do a crossover, so it’s best to go ahead and act, if the prior two conditions are already in place.

For quick profits with a Triple-Whammy Perfect sell (ShortSell-High-then-Buy-Low; or Sell-to-Close Long Position), these same three legs are as follows:

(1) The candlesticks will violate the upper Bollinger Band.
(2) RSI must rise into overbought territory, over 70, and preferably in steeply overbought territory, over 80.
(3) The MACD (blue) line must be above the signal (red) line, and rising; and then must turn back downwards and cross the signal line. The crossover is the final confirmation.

This strategy is available as well as an additional advanced strategy that we just put together called the VWAP Support Swing Setup. Both of these strategies will greatly enhance your trading right away by informing you of the trading ranges that you are in and how to enter and exit your trades. There are other various disciplines for learning how to participate in the market, however I would have to write a book and not an article to cover those points.

As time goes on you will notice the shift into other emerging markets and you will wonder how come I did not participate? You will eventually be able to correctly identify these companies with a little bit of research and some technical analysis, and not only that, but make a brilliant entry into the equity/investment. Buffet even mentions entry, or margin of safety as a critical part to his investment thesis.

Another item to mention is that the market never discounts the same thing twice. In other words the news that is currently out has already been priced into the market. It would take a major bank failure to really crack this market lower (my vote is C Citigroup Bank). If this happened then everyone would start selling on the news and grabbing profits from the last six to eight months where they have just ridden the upward wave. GDP was positive 5.7% but most of that number came from an increase in businesses buying to re-stock their low inventory. This does not mean customers are flocking to their stores and purchasing. Consumer spending is still weak (except in China and Brazil).

A discovery for Alzheimers or Leukemia could be in the making for this year strengthening the bio-tech sector as a relatively good sector to be involved with.

Financial reform is in order for 2010, stagnating bank growth for the next year or two. However, whenever bank reform is in the air the powerful boys of Wall Street will create new financial vehicles to earn more and more money. Where do you think Private Equity, Hedge Funds, and Bundled Securites came from? Historical bank reform leads to present investment vehicle modifications.

With all this said I want to summarize by saying we need to remain cautiously optimistic about where we invest our cash into these precarious markets. If we do get a pull back to those Great Depression like lows, it will be a good time to hedge your portfolio with some short sales, and book profits from the recent March Lows meanwhile keeping your money at work trading and investing following a specific set of rules. Continue practicing no matter what happens whether that be in sports, life or the trading and investing.

Here is the chart.

Until next time;

HAPPY TRADING and INVESTING!

the C² Trading Team

Visit C² Trading at http://www.csquaredtrading.com

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