Stocks & Commodities V. 26:13 (16-21): Following The Crowd After A One-Day Correction by A. Trongone, PhD, CFP, CTA

Following The Crowd After A One-Day Correction by A. Trongone, PhD, CFP, CTA

All is not lost after a meltdown in the markets. Here’s how you can find profitable opportunities.

IN the days following a nasty single-day correction, if the overnight session advances, are daytraders more receptive to taking a long position during the regular trading session? The trading days following a painful meltdown can offer a profitable opportunity by simply tagging along with the current direction of the morning market.

After experiencing an extreme loss during the regular trading session, if there is an overnight run to the upside, a daytrader’s psychological response is to take a long position. Apparently the prospect of missing the opportunity to get their portfolio back to precorrection days is incentive enough to dismiss the concerns of doomsayers. Conversely, the fear of exacerbating yesterday’s loss can keep you on the sidelines until the dust settles.

This phenomenon is more compelling with the new country funds, especially those funds enjoying lofty returns. The attraction of trading these indexes stems from the perception that the countries will generate sustainable economic growth.

China, which has been dominating the financial papers, has been a lucrative play. A good way to position yourself in this market is to play the iShares FTSE/Xinhua China 25 Index. In its 786 trading days, this country fund has gone from a starting price of $53.60 (October 12, 2004) to $172.29 (November 23, 2007). Despite this excellent performance, a $128.50 profit was during the overnight trading session, whereas the regular trading session was unprofitable, losing $9.81.

Here is a system that maximizes profits by either refraining from trading or entering into a long position after a meltdown — that is, in the days following a regular trading session loss of a full percentage point or more.