I’ve been chewing on the pronounced change in the direction of the stock market since the collapse earlier in the month, and it took our Head Trader, Al, to simplify it for me. “Jay” he said in his heavy-handed yet somehow patient mqanner, “pull up a monthly chart of the Dow” — see Figure 1. I looked up said Monthly chart and sure enough it becomes clear that we’ve been in a primary downtrend all along, and the ‘09 stimulus rally, as so many pros pointed out, was just a massive secondary move. 

Earlier in the day I had been trying to make some lunch money playing GBPUSD from the long side, and it wasn’t working. I thought I had everything covered, higher time frame trends, proper set-up, appropriate trigger….but olde GBPUSD just wouldn’t go.  It hit me afterwards. “Bear Market Rules” . 

The U.S. Stock market is currently the most influential market out there IMHO. As the old adage goes, “if U.S. stocks sneeze, the rest of the world catches a cold”. If U.S. stocks are in a bear market my thinking is: the rest of the world better batten down the hatches, and bear market rules apply.

From the perspective of the currency market, bear market rules mean a bull market for the U.S. Dollar, and a bear market for the majors. Bear market rules are a bit different from the norm when it comes to operating in asset class markets. In your classic healthy to semi-healthy asset class market one wants to buy strength and sell weakness. In a bear market one needs to mindful of the largest short covering spurts coming from the weakest markets because they have the most short positions in them, which is a marked change for professionals. It means buying weak markets first, and selling strength — a hallmark of amatuers in a normal asset class market.  Again Bear Market Rules.        

Figure 1

Another tenet of bear market trading is the risks increase because markets go down quicker than they go up. Anyone who didn’t pay heed to that massive double top w/ negative divergence on the Weekly AUDUSD chart, not to mention that little diddy from Down-under the RSPT  — Resources Super Profits TAX – learned that lesson…

Combine impulse downmoves — a bear market – with impulse corrections– corrections often start out impulsively tricking small traders – and you have very choppy waters to swim in. What this means is you need to learn to be adept at trading lower time frame charts to cut down on the risk. Once again: Bear Market Rules.    

Jay Norris is the author of Mastering the Currency Market, McGraw-Hill, 2009, and a trading instructor at Trading-U.com 

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DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor. Risks include the potential that changing political/economic conditions may substantially affect the price/liquidity of a currency. Investors may lose all or more than their original investments.