How You Should Be Managing Your Investments, One Week After Brexit Vote

Here are the trading patterns and setups you should be looking for over the next few weeks, as markets continue to absorb the shock of the Brexit referendum.
By Kunal Desai ,

Editors' pick: Originally published June 30.

Brexit -- is it the beginning of the end? Analysts across the world are exploring whether this event could lead to the disbandment of the European Union and the next major stock market crash. But nearly one week after markets tanked on Britons' vote to exit the EU, what you should really be asking yourself is, "How do I make money going forward from this 'catastrophe'?"

Well, if you have a trading plan, now is the time to be following it with the utmost discipline. And you should have been following it already. For instance, if you hadn't been expecting the "Leave" camp to win the referendum, you might have been invested in a few long positions. After the market's drop on Friday, those positions probably declined in value and triggered your sell stops. (You do employ protective sell stops, don't you?)

By following your trading plan, the remainder of your capital would have been preserved by avoiding Monday's secondary 1.8% drop on the S&P 500. You would've also disregarded the bulls advising that now is the time to buy because it is unlikely that there are any bullish trading setups for you to even enter. Admittedly, I didn't scour all corners of the market, but I imagine the only setup would be the pullback and even then I doubt that your trading plan advises you to enter positions when your stock is pulling back with fierce volatility and high relative volume. Basically, your plan should be designed to preserve your capital by respecting your stops and stepping aside when there are no actionable setups. That time is now.

Momentum is undeniably on the downside and alternatively, if you are a short-term momentum trader, now is the time to be entering bearish positions. The last time the market showed initial signs of a major selloff, they were catalyzed first by Greece, and then by China. Analyzing the S&P 500, both times volatility increased dramatically, with a sudden ramp up in relative trading volume. More importantly, as a result, both times the S&P 500 did not stop dropping until about the 1820.00 level, before bouncing back to prior levels. There is no guarantee that this pattern will repeat itself, but this has been the new trend for the market in the past two years. Taking clues from recent history, there is a large chance that the S&P will drop continuously in the next couple of days down to that same level.

We look for stocks that have developed a sudden and unexpected interest from the public resulting in fast-paced surges in price action fueled by a boost in trading volume. On a daily basis, only a handful of stocks fit these criteria, but in the wake of Brexit, that number skyrocketed to the short side. Many long setups have likely been destroyed, but there is a good chance that strong contenders for bearish setups will begin materializing in the next few days. One of our personal favorites is the bear flag pattern, which is simply an inverted bull flag. You can see this in the chart of Barclays (BCS) - Get Report .

Chart courtesy of TC2000.com

A necessary characteristic of a valid bear flag pattern is an exaggerated price action fueled by strong volume, a.k.a. the "pole." The price action of Brexit has caused numerous poles to materialize in the market. All we need to do is enter the stock if the stock consolidates sideways and breaks the flag's support level. Here's an example of a recently successful bear flag, in Whiting Petroleum (WLL) - Get Report .

Chart courtesy of TC2000.com

Stalk the market for setups like this over the next few weeks to see if this type of pattern materializes. If you keep your discipline and respect your trading plan, you surely will turn a profit off  everyone else's fears.

See full Brexit coverage here.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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