• How to get prepared for a possible market weakness

    We all know that this market has been liquidity driven and now very much overextended.
    It is hence relatively easy to have conflicting feelings:
    - The first feeling is to believe that we are astute investors and that our capital gains are due to our expertise and method. This sentiment could lead us into taking more risks.
    - The second feeling is the well-known fear of losing one's gains.

    How then to be able to continue riding the trend while limiting risks on a possible heavy pullback?

    The first indicator is the 20DMF. This is a trend following indicator. This indicator will turn short (Red lines) in case of market downturn and will reverse to a long position (Green lines) if there is a bounce.



    The second indicator is the NQ8 Money Flow. It is the MF calculated on the eight most liquid stocks: AAPL, AMZN, GOOGL, MSFT, NFLX, TSLA, FB, NVDA.

    We can see below that the NQ8 issued two short signals (Red lines) but these signals were cancelled by the long signals shown in Pink. The ideas here is that liquidity has to come mostly in the largest stock because they are the easiest to accommodate the type money that is invested.



    I post below the Pyramid data of a few of these stocks. We can see that there is no sign of weakness here.











    When you detect weakness in the above 20DMF and NQ8 indicators, you can opt to buying Index puts. As can be seen below, QQQ has greatly outperformed IWM for the past three years.



    This means that in case of a pullback, it is best to short the weakest index, whihc is the IWM small caps. This can be clearly seen below: small caps use to fall harder on pullbacks.



    Another way to protect your investment is to concentrate into value stocks instead of momentum stocks. This basically means trying to focus on low P/E large caps instead of High P/E small caps.

    My two long positions: BMY and MYL offer respectively 10.7 and 4.8 P/E. Selling on a weak EV pattern can sometimes be a mistake for these stocks. For example last December I sold a part of my BMY long position when I detected a strong EV selling pattern. We can see below how the stock moved afterwards.





    Finally, you can also opt to shorting some stocks such as GWPH or BEAT

    http://www.effectivevolume.com/showt...-a-short-ideas

    http://www.effectivevolume.com/showt...T-a-short-idea

    If you open new long positions, then you might opt to selling covered calls.

    http://www.effectivevolume.com/showt...AMRN-Long-Idea