Prepare For Counter-Trend Rally

It took awhile, but we're finally back to oversold (i.e. below the 20 level in the T2108). A break of today's lows will put us into extreme oversold conditions and you know what that means - be prepared for a counter-trend rally.

We couldn't get back to oversold without seeing the market leaders taken to the woodshed which is finally what happened today. Just look through stocks that were on my relative strength scan (see below) and you'll see what I'm taking about. We need more of this to really shake out the bulls. As of the close, we're not at extreme levels of oversold, but another day like this should get us there.

A lot of people like to call bottoms, but without serious bloodshed were only delaying the inevitable pain that is both necessary and healthy. That's why I said last week that the market needs to get on with it so that we can at least have a chance for a counter trend rally. Perhaps not tomorrow, or even this week, but given the degree of carnage I'm finally seeing we have to expect "something" to go right for a change.

Indeed, oversold markets can become even more oversold and, as both an investor and trader, I'm hoping that this one does seriously overshoot to the downside like usual. That's the only way to get us back where we need to be and where serious profits can once again be made. With that said, if you're long-term focused, it is time to at least start to think about putting some of that sidelined cash to work in your favorite names and/or ETFs and at the same time expect more pain while doing so. (Yes, time to wake up if you use lazy portfolios).

As a guiding principle, please also remember that the most difficult decision in this market is likely the best one for you and your portfolio. For some, that will mean taking a painful loss now to avoid a greater one and future margin calls that are going to wipe you out. For others, it means that the cash you've been smart enough to sack away and out of Wall Street's greedy hands should start to be moved back in. And, if you're somewhere in the middle (most are), it is time to do some damage control and make sure that your portfolio is reflective of your goals and risk tolerance.

The bottom line - you must take time to ask and answer some really tough questions. Can you handle it if the market keeps going down? What's the most you can afford to lose? Would you buy the same stocks and ETFs you own now again if you didn't already own them? What is the toughest decision for you to make right now and why? These questions are always good to ask, but if you haven't yet, there's no better time than now. The most important part of being an investor or trader is facing the tough questions that none of us like to answer but must if we're going to prosper. Having these answers will help you know what to do when this market bounces.