How to Profit in a Market like This

by Darrin Donnelly on February 24, 2011

Click on chart to enlarge.

Click on chart to enlarge.

When the market shifts into a downtrend, it can happen quickly. 

Last week, we were humming along in a powerful uptrend that continued to produce higher highs and higher lows.  On Tuesday and Wednesday, the sentiment changed dramatically. 

High-volume selling walloped the market, dropping the NASDAQ nearly 4% lower in just two days.  The increased volume during these two sessions gave us our fourth and fifth distribution days in less than one month.  The NASDAQ also slashed through its three-month trendline and its 50-day moving average (marking the first time the NASDAQ has traded below the 50-day line since September 2nd of last year). 

All this action confirms that we have shifted into a Stage 4 Downtrend.

This abrupt move lower was triggered by the chaos in Libya, which has caused oil prices to skyrocket.  Investors are worried that this could be just the beginning of a prolonged rise in energy prices, which could put pressure on the rebounding economy.  (I also happen to think that many investors used the news from the Middle East as a good reason to take some profits after riding the strong uptrend that began more than six months ago.)

Regardless of what the causes were, our objective is to make money from this shift in the market’s trend. 

Here are two ways to profit from this break in the trend.

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