A 10% decline from the highs is known as a correction – so the Nasdaq can be assumed to now be in a correction.
Leading up to a correction – and the correction itself – is often a panic period for many traders.
A 5-10% pullback is normal for the market to endure during a good bullish trend. These pullbacks are often a buying period where we can start to take advantage of new trends.
However, new trends from corrections do not always happen overnight – it can take many months to unfold. So do not expect immediate gratification.
If you are swing trading, wait for the new trend to start and buy after an AE (minor or major).
If you are growth investing then buy the opportunities when they present themselves.
Don’t focus your energy trying to pinpoint the lowest point of entry as price will often make you feel foolish and move even lower (or sideways) after you enter.
Instead, focus on getting in and staying in.
Time in is more important than timing.
Trying to achieve growth through spread betting is a clumsy approach at best – so growth investing is best suited for buying physical shares.
Use spread betting for swing trades only. You can swing trade with shares, too, if you are happy to trade without leverage.
Finally, with every pullback there seems to be panic. In fact, we should consider renaming pullback patterns to “panic patterns”! Learn to embrace pullbacks, understand pullbacks and trade pullbacks.
Below is a chart of the Nasdaq – you can see this is just the third time in almost a year price has declined to the depth it has.
In the last year, we have enjoyed over a 100% rise so ask yourself – is a 10% decline really a big deal?
Those of you familiar with Fibonacci will recall 38-50% declines as being normal.
Of course any pullback could turn into a full blown bear market but generally:
- The first part of a pullback should be assumed normal (0-10%).
- The second part (10-20%) should be treated with more caution so tighter stops and partial exits would be acceptable, as would pilot positions.
- The last part of the pullback would be into bear market territory (20% or more) but generally requires participation from all the major indices.
The S&P 500 and Dow Jones Industrial Average seem to be on a different near-term trajectory for the moment.
Let’s go trade!