The stock market is a master manipulator. It conditions us to think a certain way over and over and over. Then, just when we are convinced of a pattern, the market magically changes character.

How does this apply to our current market? For the past year or so, the pattern has been “shut up and buy the dips.” In other words, whenever the market flashes warning signs, we get conditioned to buy because the selling stabilizes and then we see a non-stop grind back up to new highs. Some of these warning signs include: Several days of distribution (professional selling) in a short period of time, the major indexes break down to (or below) their 50-day moving averages, and many leading stocks begin to weaken.

All these warning signs are currently happening again right now. So what should you do? It all depends on your timeframe. I have one friend who has a longer-term timeframe and he’s still aggressively long this market. I have another friend who’s a trader and he went to 100% cash last Friday (1/24/14). Personally, I always lean towards defense. I’ve learned hundreds of lessons in my 18 years of trading, but the most important one is to PLAY DEFENSE. The greatest traders I have met or studied all have one thing in common: they play defense and cut losses when wrong.

Can this market bounce back from here? Of course it can. In fact, the market has conditioned us to think this way over the past year. The bigger question you need to ask yourself is: What is your timeframe? What are your objectives? What is your risk tolerance? Are you a trader or investor? Remember, you shouldn’t blindly follow what anyone else is doing. You should have your own plan and have conviction and confidence in what you are doing.

Even if the market bounces from here, as I wrote in my 2014 Outlook, it wouldn’t surprise me to see the market down 10-12% at some point this year before rallying back and making new highs. Again, whatever action you take simply depends on your own financial objectives. If you don’t have a plan, I suggest getting one soon. Good luck trading!

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