It might be a bear market. But, that does not mean prices will go straight down for the next few months. Even in bear markets, there are times when prices move higher. This is true in even the worst bear market.
The chart below shows what might be the worst bear market in U. S. history. It’s the Dow Jones Industrials Average from 1929 to 1932. The index fell about 90% over that time.
At the bottom of the chart is a zig zag indicator. This indicator reverses direction whenever prices move at least 10% from a high or low. From the peak in 1929 to the bottom in 1932, even as the index moved 90% lower, there were 13 rallies of at least 10%.
Those rallies are a chance for investors to pursue short term gains. But, doing so will require preparation which involves having a trading plan perhaps with multiple strategies. Some of the most effective yet relatively simple strategies were developed by Larry Connors.
Double 7s
One of the strategies that Connors developed is known as Double 7s and is described in detail at TradingMarkets.com:
“The stock market is made up of numbers. The amounts, if you will, are constantly changing up and down and all around. As you can imagine, this constant change has led to some pretty crazy ideas from investors and analysts who think they have seen a pattern emerge of some sort or another.
These theories run the gamut from simple to exceedingly complex. Most of the number pattern theories fall apart when tested in a rigorous scientific manner. It seems the more complicated the idea is, the more variables, the less likely it is to contain any edge. Traders keep searching for these repeatable patterns, often without or ignoring the evidence that most roads simply lead to more losses.
We discovered a very simple number pattern that has stood up to testing placing the odds of success at 80% since 1995. It’s called the “Double 7s Strategy”. It is so simple that many dismiss it as being too naïve to actually contain an edge. However, extensive testing and real life experience has proven otherwise. In a nutshell, the tactic has 3 rules:
- The SPY is trading above its 200 day moving average
- If the SPY closes at a 7 day low, buy
- If the SPY closes at a 7 day high, sell
Believe it or not, that’s it! Since 1993, this simple number method has been correct 80.4% of the time. This strategy also tests out in a variety of other indexes and equity ETFs.”
Understanding the Strategy
The Double 7s is buying dips in a bull market. That is an effective long term strategy and the testing shared by Connors reveals that it is also an effective short term strategy. Notice that the strategy has been tested in a variety of other indexes and equity ETFs.
First of all, it is important to consider the differences between ETFs and stocks.
An ETF, or exchange-traded fund, is a marketable security that tracks a stock index, a commodity, bonds, or a basket of assets. This might sound like a mutual fund but as Investopedia explains:
“Although similar in many ways, ETFs differ from mutual funds because shares trade like common stock on an exchange. The price of an ETF’s shares will change throughout the day as they are bought and sold.
The largest ETFs typically have higher average daily volume and lower fees than mutual fund shares which makes them an attractive alternative for individual investors.”
As a basket of stocks, an ETF will have less volatility than an individual stock. That means the Double 7s strategy may not work as well on individual stocks and could be best used with ETFs. In fact, a stock at a 7 day low could be reacting to news and could be moving still lower.
Another important point in the strategy is the 200 day moving average (MA).
One of the greatest trades in history, Paul Tudor Jones, uses the 200 day MA as a filter. In an interview with Tony Robbins for the book “Money: Master the Game,” Jones said,
“My metric for everything I look at is the 200-day moving average of closing prices. I’ve seen too many things go to zero, stocks and commodities. The whole trick in investing is: “How do I keep from losing everything?”
“If you use the 200-day moving average rule, then you get out. You play defense, and you get out.”
That MA kept Jones from suffering large losses in the 1987 stock market crash and could be useful for many investors as well.
Now, there is always a bear market somewhere so even though the S&P 500 may be below its 200 day MA, there are other indexes that could be above their long term MA. They could be trading candidates even in a bear market.
Moving Against the Trend
Even in a bear market, for example, short term interest rates could be providing a bull market by trading above their 200 day MA. The chart below shows iShares 1-3 Year Treasury Bond ETF (NYSE: SHY) which was recently above its 200 day MA.
In addition to fixed income, commodities could be another source of potential gains. The next chart shows Tecurium Sugar Fund (NYSE: CANE) which is also above its 200 day MA.
This strategy could be one for traders to consider, especially if the bear market drags on as bear markets are prone to do. Traders could create a watch list of ETFs tracking alternative assets like fixed income and commodities. They could then monitor the relationship of price to the 200 day MA.
International ETFs could also be used with this strategy and in 2009, international ETFs did bottom prior to the ultimate low in the S&P 500 in March of that year. Watching emerging markets could therefore create profit opportunities in the short term and tip investors to a trend reversal in the long run.
But, patience will be required to find success in a difficult market and traders should not expect opportunities to develop every day.
Trading in a bear market will require time and commitment to use. Many individuals discover that they are not able to complete the required amount of research because that can take an extended amount of time and they have other personal and professional commitments competing for their time.
The TradingTips.com service, PPK System, is designed to exploit patterns associated with market clues by looking for value and momentum in stocks and could spot the potential winners based on a variety of factors.
This combination of value and momentum has been shown by many researchers to be the cornerstone of strategies that beat the market in the long run. The PPK System follows strict rules for buying and selling. You can learn more about this trading service by clicking here.