What's Your Time Frame?

Strategy is a style of thinking, a conscious and deliberate process, an intensive implementation system, the science of insuring future success.
-- Pete Johnson

Depending on your strategy, style, approach and time frame, this market is either very simple or very complicated. There is absolutely no question that the major trend is down. Although the Nasdaq and the small-cap indices have not yet taken out their lows of earlier this year like the DJIA and S&P 500 have, they are certainly heading in the same direction.

If you are a position trader or have a longer-term time frame, you should simply defer to the fact that we are in a downtrend and stay very defensive. In order for the market to justify doing much buying, it has to first find a bottom and then prove itself with some follow-though to the upside. Only after the market has given us some hard evidence that the trend might be reversing should we be buying. There is nothing too complicated about respecting the fact that the trend is down. We might be enticed by short-term bounces, but the market is acting poorly and there is no reason to rush in buy.

However, if you look at things from a shorter-term standpoint or if you're a very aggressive short-term trader, you have to be thinking about catching some sort of countertrend bounce. The selloff has been very severe, which has left a number of oscillators with oversold readings and sentiment extremely negative. The percentage of stocks trading above their 40-day simple moving averages is less than 10%, which is a level where bounces almost always occur. When things get this bad, there is always the chance of some sort of relief bounce.

While there are myriad extreme readings that give the contrarians great hope for a bounce, we haven't managed the sort of panic or capitulation necessary to trigger a final cleansing washout that would lead to a bounce like we saw after the SocGen low in January or the Bear Stearns low in March. Typically an oversold market like this will eventually find a catalyst to support a rally, but so far it has not, and that is the big danger in trying to anticipate a bounce. We could easily see more downside before we bounce. If your timing is off here, it could prove to be quite costly.

On the other hand, an oversold bounce at this point could be quite powerful, and short-term, aggressive traders have to be ready for one.

So take your pick. Either focus on the bigger picture and respect the downtrend or get aggressive and try to catch a short-term bounce. Whatever approach you take, you have to stay disciplined and be sure to appreciate the fact that this market is not a healthy one.

No positions.

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James "Rev Shark" DePorre is the author of Invest Like a Shark: How a Deaf Guy with No Job and Limited Capital made a Fortune Investing in the Stock Market. He is founder and CEO of Shark Asset Management, an investment management firm, and he also operates sharkinvesting.com, an interactive online community that serves and educates active investors. DePorre holds business and law degrees from the University of Michigan, is a member of the Michigan Bar Association and a former tax attorney and CPA. He lives in Anna Maria Island, Fla., with his wife and two children. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Rev Shark appreciates your feedback; click here.