Sometimes, the best trade to make is no trade at all.
Coming off the Labor Day holiday, the Darvas System told us to go completely to cash. As we enter this week, cash is still the place to be.
The market confirmed that cash was king at the end of last week as the NASDAQ recorded two straight Distribution Days on Thursday and Friday.
These two fresh Distribution Days brings our count up to four in the last 20 sessions. This action puts us on alert for a potential snap back into a Downtrend.
But that doesn’t mean that a Downtrend is inevitable.
Despite the increase in Distribution Days, several leading Darvas Stocks are setting up nicely as they near their buy points.
Right now, the market appears to be approaching a “tipping point” that could lead us to a big move in either direction – to the upside or the downside. This should be a crucial week where the bulls or bears take control and tell us which way this market truly wants to go.
This is a “Neutral Trend” environment for us. Any new purchases should be kept smaller than normal as they carry an increased risk of failure. Obviously, you should avoid the use of margin right now.
It also means that now is not the time to consider short and erratic bases for potential new positions. In a strong uptrend, you can get away with this, but not in a market where selling pressure is increased. This means that only sound bases of at least four weeks in length should be considered.
Remember, Neutral trends don’t always lead to Downtrends. They can often mark a positive “resting” period where leaders take a breather and build new bases as they prepare for fresh breakouts. In this sense, Neutral trends are very constructive, even if the choppy/sideways action they produce can be frustrating in the short-term. The key is to be extra cautious during this time.
However, Neutral trends CAN be the precursor to a Downtrend. For this reason, you want to be ready for a potential market correction by having a plan for making big money if we do enter a Downtrend (this plan is revealed in great detail in my newsletter).
Being a successful trend trader means making money in Uptrends and Downtrends. It also means sitting safely in cash when the market lacks conviction in either direction.
You want to trade cautiously right now. The whipsaw action often experienced in a Neutral Trend environment has a way of crushing traders who jump in too early and too aggressively in either direction – long or short.
We may be on the verge of a powerful Uptrend or we may be on the verge of another market correction. The key is to be patient, put aside biases, and let the market tell us where it wants to go.
* Now would be a good time to give the Darvas System a try. The Darvas System is a powerful trend-trading method that makes money whether the market is going up or down, and also tells you exactly when you should be sitting on the sidelines. You can access our list of current Darvas stocks – with EXACT buy points and sell points – by clicking here and instantly downloading Darvas Trader PRO.