On October 5, 2012, the market sent us a message that it has entered a downtrend by having the DJIA closed with a new non-confirm high and I posted this "We Need To Listen To What The Market Has To Say". In addition, on October 13, 2012, I posted an update on the market’s trend "Stock Market Review - 10/13/2012" when it reaffirms its direction. The market has definitely set off the alarm to inform us to tighten up our stop on the longs to protect our profits and preserve our capital. More importantly, it has alerted us to either move to cash or start focusing on short setups from the stocks (commodities, ETFs, etc) that are in a downtrend.
Here is an example of a downward trending stock, AMZN. In the first chart, AMZN price actions look very similar to the SP500 (SPX). It formed a double top, broken this price pattern’s supporting baseline on October 10, 2012, and closed below the 50 SMA (green) along with a declining 20 EMA (aqua).
The following chart shows AMZN established a downtrend by making a series of lower low/lower high.
Finally, the chart below shows the latest price actions re-affirm the downtrend by breaking the multi-month trendline, failed to move above previously broken support level, and formed another lower low that help define the downward price channel.
Until AMZN has reversed the current downtrend by breaking out of the downward price channel and made a series of higher low-higher high, one should look for short setups to go short after it has encountered resistance or broken support. When a stock is in a downtrend within a down market, the odd for a profitable counter trend trade is low. The odd for a successful trade is much better when we trade with the trend.
Disclosure: Long AMZN PUT
