What to Do When the Bear Growls

When the action is ugly, you have to formulate some new rules.
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Yes, I know. You're looking for charts. And I will have charts. Just not today.

Reason? With all the volatility going on, and charts changing dramatically within hours, it does you little good to look at a chart that's even three hours old. And three hours from the close is about the time I have to pull up the charts, think about them, write some comments, and send it off to the editors so they can post the next day.

So, what I did was wait until the close Friday to do my charts, and then I'll post two columns' worth on Monday about midday. At least they stand some chance of being fresher that way!

But as long as I have your ear, here are a few thoughts on what I'm doing. We each have our own risk tolerance, time frame and pain levels, and my parameters may or may not match yours. Therefore, my game plan might not match yours either. Still, I wanted to share my thoughts because it might help crystallize yours.

OK, this market worries me. A lot. Now, maybe that nails the bottom. Great. Fine. Then believe me, I'll be quite happy to take credit for marking the end of the bearishness.

Still, I don't think the pain is over, and here's the reason: Think back to my Friday

column. Remember when I was very bullish coming into the morning? (And, truthfully, I was dead on for the better part of the day.)

Of course, by the end of the day, things really got messy. And that shook me. Why? Oh, not because I was wrong, but because I was wrong when everything -- the charts, the degree of negative sentiment, the number of people sitting on the sidelines, my own internal gyroscope -- screamed buy. I am wrong a lot. But rarely am I so wrong when I think I am so right!

And

that

was humbling! Not to mention eye-opening.

But you know what else bothered me? When stocks like

Harley-Davidson

(HDI)

,

Swift Energy

(SFY) - Get Report

, and

Lowes

(LOW) - Get Report

got crushed. I was long Lowes (a home improvement store, for crying out loud) and it gets annihilated. Now, that's indiscriminate selling.

And, when you have indiscriminate selling, you have people selling into every uptick.

Every

uptick. And that hurts every long, no matter why or when you bought it.

So what is my game plan? I'm not taking any longs for the reason above. In addition, the tone of the market impacts about 75% to 80% of all stocks, no matter how strong their charts look. If we're in a bear market, the odds are distinctly against you no matter what stock you're trading or how good your chart reading is.

So, go short? Unfortunately, now's not the time either, because stocks are in a free-fall and prone to vicious snapback rallies. Better to short into a three- or four-day rally as we had a few weeks ago when the

Nasdaq

crawled back to 4500.

OK, then, where do I stand? Right now I have no longs working, having regretfully closed them late on Friday morning. But let me tell you this. When you are scared or worried, then do

not

screw around with getting out. Just get out. Don't try to game a pullback, or wait for a better opportunity. Yes, sometimes that works. But, what usually happens is that it doesn't work, you panic, and you really cost yourself some money. A good example for me was a position I had in

Nhancement Technologies

(NHAN)

. It gapped down 2%, and I sold. That hurt. But 20 minutes later it was down 20%! Now, that would have really hurt. And all you need is one of those free-fall stocks to screw up everything else.

One last word on a bear market. I heard a commentator talking this morning about buying "good, quality companies" like

Cisco

(CSCO) - Get Report

. Yeah, maybe that works if your time horizon is years. But remember, in a bear market, there is no such thing as a "good, quality company." They

all

stink!

Finally, let me end on some good news for all you longs or folks waiting to get back in. Historically, whenever my win rate on the longs hits about 75 to 80%, that marks a top. Similarly, whenever my win rate on the shorts approaches 80%, that marks a bottom.

Friday afternoon, it hit 77%.

More on Monday, when I'll have my normal rambling mess of a column, and a few Technical Forum columns with plenty of charts!

Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Smith writes five technical analysis columns for TheStreet.com each week, including Technician's Take, Charted Territory and TSC Technical Forum. While he cannot provide investment advice or recommendations, he welcomes your feedback at

gbsmith@attglobal.net.