Healthy Bull Market Correction – Buying Opportunity?

by Olivier on November 16, 2010

Everything was down across the board. A great day to spend some time away from the screens. Well, yes and no. We had a huge run-up so days like today are much needed corrections to build bases and pressure for a potential further run-up. Being glued to one’s screens and worrying is not the way to go though. These are days to closely monitor stocks in order to find out more about their personality, how resilient they are and if they display relative strength compared to the stocks in their peer group.

The key question here is if we are witnessing a healthy and normal pullback within a strong bull market with further gains down the road, or if this the beginning of something more serious like the start of a bigger correction or the end of the up trend. Nobody can tell and for now we don’t have the benefit of hindsight. What we can do though is making educated guesses. Right now it looks like lots of people are viewing this pull back as a buying opportunity.

Two things I am monitoring in order two gauge the health of this bull market:

  • Financials: XLF the Financials ETF has recently started to break out and has now given back all the gains and has probably pulled back a bit too far. Still, technical damage is very limited and if it can move up from these levels this should be considered a green light. Financials are widely considered to be extremely vulnerable and unable to move up as it was one of the weakest sectors in the last months. As a matter of fact they are not breaking down. That’s a sign of the market’s strength.
  • Shipping: TK – Teekay and SFL – Ship Finance International are holding up extremely well. TK is not only holding up well it looks like it wants to go higher soon. Shipping is associated with the idea of business picking up. So the idea is that the recovery is making progress. If that’s the case, shipping stocks will profit. If they can hold up well and start moving to the upside that should be interpreted as healthy technical action indicating the overall bull market is likely to continue.

That being said, in a bull market you are supposed to buy dips, hold on to your shares as long as you possibly can and ride the trend. The more it hurts, or put another way, when you feel like you want to puke, it usually is a good time to buy and add to existing positions.

A sound trading rule is to buy the first pullback. Today was the first deep pullback in the Uranium sector. Well, maybe not deep enough. That’s why I added cautiously to my DNN – Denison Mines and UEX.TO – UEX Corp positions as opposed to buying with both hands.

Riding trends at times means you have to be willing to give back some of your gains for much higher gains down the road. Of course it is always a tough decision as you never know if pull backs are healthy and normal bull market action or if it is the starting point of a bigger correction or the end of the uptrend.

Some thoughts on Uranium vs. Gold and Silver:

  • Gold + Silver: Much stronger and mature trend. Less overhead resistance.
  • Uranium: A trend in the nascent state. Less crowded trade.

I still believe down the road odds are great for higher gains to be made with Uranium stocks. But the case for precious metals is almost equally compelling. That’s why I am always closely watching Gold and Silver for possible entries. Right now my most recent public list addition CNL.TO – Continental Gold is my proxy for the gold market’s health. If this stock can break out to the upside I will be looking to initiate positions in the precious metals. Let’s see what happens.

The main purpose of the stock market is to make fools of as many men as possible. – Bernard Baruch

My public list with all my charts can be viewed here:

Buenas noches!

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