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Friday, 7 December 2007

5 Mistakes to Avoid in a Market Trading Below its 200-Day Moving Average

1. Don't Buy Stocks Below their 200-Day Moving Average!

Yes, nearly every stock will eventually bottom. In the meantime, it looked that way when Fannie Mae (NYSE:FNM - News) was trading in the $40's, Freddie Mac (NYSE:FRE - News) was 20 points higher, and Citigroup (NYSE:C - News) was 25% higher. For every falling knife you may catch, you run the risk of getting sliced up along the way. Avoid these stocks, and find the better names to own.

You can find the better stocks above their 200-day moving average on PowerRatings.net. These are not short-term trading stocks, they're solid longer-term stocks. You may also want to look at the PowerRatings Live Blue Chip Portfolio, which was opened on August 1. The market is down nearly 3% since that date, and these blue chip stocks are up over 8% (the portfolio's current holdings include IBM, MMM, GOOG, and JNJ). All these stocks have high PowerRatings and are the types of stocks you should consider in this market environment.

2. Avoid Naked Options

Wow, these premiums look nice today, especially the out of the money puts. Those premiums looked the same in 1987 before the crash. And before the debacle in 1998, and in the technology and internet sector in the summer of 2000 after the first sell-off. Avoid the urge to pick up nickels in front of a steam roller.

3. Avoid the Spit

How do you do this? By keeping the television off. Guest after guest after guest comes on and SPITS their opinion. One spits that the market has bottomed and is going up, and the other spits even harder that it's the end of the world and the markets are going down. These are smart people with good educations, and they certainly know spitting sells!

4. Hedge, if Possible

If you can find stocks that have pulled back sharply that are still above their 200-day MA, you can buy them, and then offset some of the market risk by shorting the Russell 2000 iShares (NYSE:IWM - News). This will be covered in more detail in the TradingMarkets Path to Professional Trading course.

5. It May Be Hard to Believe, but it's Not the End of the World

Let's put things in perspective...This is a painful drawdown - the worst in over five years. But as we all know this is not the end of the world (although a few of the professional spitter's will do their best to have us believing it is). If you are bold enough, you will view this as an opportunity. If you believe we're in a bear market, there will be ample opportunity to profit on the short side. And if you believe the worst is over, there is ample opportunity ahead of you on the long side.

Over the past 20 years the market has had significant sell-offs. 1987 was awful, 1990 hurt, 1994 also hurt, 1998 was very scary (meltdown talk), and 2000-early 2003 was just plain bad. But each lead to new market highs (record highs were hit only five weeks ago!). This sell-off may end in three years, or it may end today. All we know is that the markets have always bounced back...always. And, if history is our guide, they'll eventually bounce back again.

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