Stock Market Recession Playbook (Learn From My Mistakes)

11 Mar 2020

Panic and fear have gripped the markets. (and rightfully so)

Just below is a list of a few of the things that are fundamentally driving the sell off:

• Corona Virus is being declared a pandemic.
  
• Massive supply shock from China due to supply chain issues.
  
• Potential country lockdowns and economic stagnation
  
• Oil prices are plunging
  
• Corporate debt is at all time high while earnings will suffer significantly
  

Needless to say, the market is in serious trouble if we don't get the situation under control.

Thankfully, I've been here before.

I suffered the consequences of my ignorance and I'd like to share a road map for what to potentially expect *IF* we do break our bullish uptrend.
(Remember, I said if. We only play probabilities once they happen and not before.)

I had first started trading from 2004-2006 in college.

When I went to graduate school, I took my profit and I put it in a broker's hands.

At the time, I had saved up about $250,000 after a 2 and a half year tour in Iraq, a few entrepreneurial ventures and my trading through college.

The money was going to be my start up capital to use to start a business when I got out of school.

I was almost through graduate school and I just had my first baby at 24 years old.

She was 6 months old when the 2008 September crash happened.

I remember because she was sitting on my lap as I watched the financial crisis happen.

I called my broker and told him to sell .

He assured me everything was fine and that there was nothing to worry about it.

The only problem is that I was graduating soon and I really needed the money. If I had sold then, I would have been okay as I was only down 25% from its all time high value.

Unfortunately, I did not. I watched my account fall another 30% as I was graduating. In total, out of the $250,000 I had, I ended up cashing out about $40,000 due to some higher risk exposure in the financial industries sector.

Since then, I've studied the markets and built myself back up to where I am today.

I'm in a strong cash position, zero debt, a hedged portfolio and prepared for the worst.

In my studies, I've learned that these markets, especially bear markets, often work very similar in how they happen.

For the playbook, I want to show you the weekly moving averages.

It's a very simple strategy, but over the course of the next 6-18 months (if we do indeed break the 200WMA and if it goes on that long), this should give you a good indication of how to play the markets.

Our first test for our current market is a test of the 200MA weekly. By far our most key level to maintain our 12 year bullish market structure.

The chart I am sharing is the e-mini futures of the S&P 500, but it can also apply to other markets or stocks.


This is a higher risk long play to play a bounce from and I would 100% close it at a retest of the underside of the 100MA weekly.

Over the past 12 years, this has been a PHENOMENAL buy zone for equities.

While typically I would expect a V bottom reversal and a boom after elections, I think this time may be different.
(I'll let my chart do the talking though and play it level by level as we get there.)

With what I know about the corona virus and the issues we will face, I just can't see this holding and I think we may have a trend reversal.

In any case, I would not try to jump in front of a moving train and start trying to knife catch these until I see a confirmation.

You can also see how it applies to the Dow Jones market here as we are NOW approaching the weekly 200MA.


Our next move can be to short the 100MA OR the 200MA from the underside if we get a strong retest. This is a low/moderate risk play.

**IF** we break and close above the 100MA like we have in the past, that would indicate further bullish continuation.

We do not want to 'average in' until we see a MASSIVE volume sell candle. We then typically see a multiple sweep of the low side structures as institutions build liquidity in the markets again.

If you are a long term investor, it's not a bad place to cost average in at these levels if you don't mind holding a 10-30% draw down for 3-6 months.

We will then see a climb on lower volume as the market slowly recovers and fear starts to go away.

This is usually driven by institutions as retail has capitulated out of the markets.

Our first entry can be a break of the downtrend or the weekly 50MA.

You can also zoom into the daily to find early entries as well, but this is for the high time frame perspective.

After that, we want to look for a break and reclaim of the 100MA weekly and last, but not least, a break and close above the 200MA weekly with a strong buy volume candle.

If you want to add an indicator in, you can use the RSI as I've shown on my chart analysis to give you higher confirmation.

Hope you enjoyed this analysis and leave some comments letting me know what your thoughts on the market are!