Thursday, September 11, 2008

The Only Way I Know to Trade Post-Boom Commodity Bust

Today I received an insightful comment about commodity stocks and my recent bounce plays:

This market is nasty. The commodity stocks you point out had a little bounce yesterday but are down again today. The selling seems indiscriminate. I have only been studying the market for about 8 year so I lived through the tech bust. The volatility of this market is amazing compared to the tech bust. These commodities names have been destroyed 20% in less than a week on top of the previous declines. Hard to play this market and you are absolutely correct abtou VERY tight stops.


I agree with the comparison of the commodity boom and the late 90s tech stocks. In fact, in both my Trade Report and in this blog I have made this comparison, with examples. However, that does not mean we should shy away from playing bounces. In fact, if you study the tech bust closely, you will find powerful bounces that killed shorts and made riches for those who knew how to play them.

I will get into it in more detail over the weekend. For now, keep in mind that you have to be careful both long and short with the commodity stocks. Even in a downtrend, you can get killed going short (especially if entered after big down moves). My studies of previous busts (tech in the 90s, television and radio pre-70s, copy machines, etc) show that it's best to only enter during extreme conditions. Go short when the market is overbought on low volume pullbacks to strong resistance levels.

Play bounces when markets are extremely oversold--and I mean extreme. Keep tight stops. You may get stopped out a few times. That's okay. The bounces that do work will more than make up for the small losses taken.

This weekend I'll post some enlightening examples of the old high flying tech stocks, and compare them to the current commodity bubble.

1 comment:

Chris said...

Thanks for the response. I am continually learning and having your comments has helped. I just started a personal trading blog today after not managing my trades very well in my head.