The Japanese Candlestick Argument in Favor of a Continuous Short in the S&P 600
How quickly time flies. It is now over a year since the stock markets posted a trend-reversal long-term Top. It was marked by a classically bearish Japanese Candlestick pattern, and has been followed all the way down during the cascade by a repetition of quite similar bearish formations. The forced takeovers attending the near-collapse of the total national financial system during the past several weeks, resulting in enactment of bailout legislation, reduced many frugal savers to a state of deep concern about the worth of, and prospects for, their hard-earned nest eggs.
It is terribly unfortunate that such a multitude of good people have labored assiduously all their working lives to save something for their “golden years”, only to be faced with a serious decline in the worth of their holdings – and the prospect of much worse to come. What is even more unhappily the case is that they have no knowledge of the protective steps which they could have taken beginning in the Fall and Winter of 2007, and ought to be taking now and well into the future.
Every investor must avoid becoming a “deer in the headlights.” The Japanese Candlestick formations which have emerged during the past several weeks continue to indicate the destructiveness of this bear market, and the absolute need to compensate for it in order to protect the value of the investor’s portfolio.
There is “insurance” available to accomplish that result. It lies in the form of Inverse Stock Index Funds and Inverse Stock Index Exchange-Traded Funds. There is a multitude of them available on the market, offered by respected firms. The goal of such funds is to increase in value when the particular Index to which they are tied decreases in value. Many of them work on a one-to-one basis – for example, a particular Exchange-Traded Fund might be structured to increase one dollar in value for every dollar by which the Russell 2000 decreases in value. Some of these funds are leveraged, for example on a two-for-one basis.
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I believe that the country is in a long-running bear market which is just now gearing up for a devastating recession In principle, I propose that every investor should create and maintain a ”Constant Short” position, using either an Inverse Stock Mutual Fund or an Inverse Exchange-Traded Fund as the vehicle; and that he or she should be depositing funds into that “insurance plan” consistently, on a regular basis. It is even possible, this way, to totally offset the possibility of loss in a portfolio. Certainly, any degree of offset would be welcome. Addtionally, it is possible to make an absolute profit, as well.
Stock and Index prices move in waves, which are clearly observable on price charts. While a “Perpetual Short” plan can be of extreme value in protecting the worth of one’s portfolio, deft use of Candlestick technical analysis can also be very useful in the identification of countertrends which can be harvested for gain in upward countertrend corrections in a bear market. Various methods of technical analysis can also be a great help in identifying the likely end of a countertrend rally and in pinpointing a unusual opportunity to “pounce on the bounce” for added profit as the market declines.
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