How To Buy A Waterfall Decline

You gotta love the emotions that start stirring when the market breaks below levels of major support. I don’t listen to major commentary sources when it happens. I’m afraid of becoming biased in some way. I try and find a clear picture of those emotions through charts.

When do you buy the waterfall decline that occurs after the break? Well.. You don’t. I swear every time I try buying a bounce, because I believe the market can’t drop any lower, I GET BURNED. When I buy the eventual change in trend, I may not always win, but I place the odds on my side, and limit risk.

Step 1. The market breaks below major support . I’ll use the Ultra QQQ Proshares exchange traded fund, QLD to illustrate.

Step 2. Move to a shorter time frame to find that clear picture. The time frame which presents the clear picture best, is the one used. This 60 minute chart starts to tell us something about who’s in charge… bears or bulls.

Step 3. The 15 minute chart really paints a clear picture. We’ve got a waterfall decline here. We want to wait until a higher low pivot forms before even thinking about buying. We also want to see increased volume near those pivot points. Capitulation. The emotion of dumping a security because of mental pain. Buy at point 1, as the candlestick forms a higher high.

Step 4. Use an even smaller time frame to mange the trade. Note how QLD moves above the 50-ma on this 5-minute chart. That’s bullish. I’ll bet those commentators are still talking about the big decline though.