Top Advisors Corner

W.H.C. Bassetti: Black Wednesday...


Editor's Note: This article was originally posted in Technical Analysis of Stock Trends on Thursday, October 11th at 1:23am ET.

Is any commentary needed?  The crack we commented on several days ago grew into a chasm--today 831.83 points, 3.15%. You should notice the similarity between this nascent formation and the action of Jan-Feb.  Neither sell-off is preceded by a top formation, but erupts almost without warning--except, of course, the broken trend lines.

The existence of this previous formation and the lack of a top formation make us think that this is beginning of a correction, not a change of the major trend. That doesn't mean it will be painless, and our analysis is subject to change. Highly subject.

Every investor has to make his own decision as to how to handle situations like this. The long term well-financed investor will grit his teeth and sit it out. More active investors will hedge with puts or short (for example SPXU) an appropriate instrument. Generally we try to hedge, but the action was so rapid that we missed the hedge trade. Another tactic is scaling out on the way down, which is what we are doing here. We think that reluctance to sell off a portfolio is understandable, but neglects the fact that you can always reenter.

Whatever, the end of this correction will present stellar buying opportunities. Some agility and alertness is necessary to seize these moments and we will monitor the action closely, so readers should pay close attention to our letters, and consider what they will do when we sound the alert.

W.H.C. Bassetti

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