After several weeks of seesaw rocky action and declining prices, traders and investors are starting to wonder if this is it. Could it be that the bull-run started in October 2002, which has now lasted over 5 years, is coming to an end? Judging by the historical ebbs and flows of the general marketplace, the time allotted for the most recent advance makes a great deal of sense as markets do tend to move in a 3 steps forward, 2 steps back pattern and 5 years for an up trend is about average. From a technical perspective, the most honest representation in my opinion, while we haven’t yet broken through the longer-term up trends, we are coming close and the price-volume activity suggests that it may be only a matter of time before this takes place. Digging a bit deeper into the technical analysis landscape one can see key groups such as Financials, Retailers and Semiconductors already breaking down and starting to follow a longer term downtrend pattern and the only question is, will these groups bring the market down the same path, or will they soon find their footing and repair damage?

The economic landscape continues to look bleak with the US consumer heavily debt laden and possibly starting to hunker down, while the housing situation continues to be in peril and the real credit issues among major financial institutions still relatively unknown to all. All eyes are on the Holiday shopping season with preliminary data mixed at best. A few data points suggest we may not be topping, including general market sentiment, money market inflows and key technical levels that continue to hold, so we must remain open minded and flexible regardless.

But what if this is the start of a longer term down trend? What if, rather than a broad market advance for several years, we are about to embark on just the opposite? Rather than throw our hands in the air and take a few years off, I believe if this does take place we must embrace the action as our style, speed and flexibility should allow us to not only weather the storm, but add gains along the way. Here are some things I have been pondering in the event the inevitable down turn is upon us.

1.) Confirm the trend – While many are already debating this fact, we are still unclear if this is actually the case. Before we can set our mind in one direction and start shifting our primary focus, we must confirm the prevailing longer-term trend. One can easily pull up a longer-term chart of the S&P, NASDAQ and the Dow to see the longer-term up trends. Once lower lows are established, the market may bounce back up to repair damage as they did after the August lows. Should they not be able to put in new highs, this will ultimately signal a new trend is in place and traders will need to shift their primary focus to the short side of the market.

2.) Until we know, we must wait – At this very moment in time we still have no clue if the general market will slip into a secular down trend or if this is another correction in the prevailing up trend. Regardless of what others may say, adopting one side or the other, we simply don’t know and won’t until it has already happened. Rather than guess, we must adopt a passive approach and chose to wait until we know for sure in which direction we will head. Once we know the prevailing trend, capital appreciation will once again trump capital preservation.

3.) Brush up on your shorting – Outside of much more patience and a slightly longer leash, shorting stocks is not all that different than going long. Yes, it is true there is the unlimited loss potential, however with solid stops in place, the odds are extremely low that one will wake up one morning to find your stock moving towards infinity. The same technical rules apply to the downside as they do to the upside, which means one has to simply envision the chart upside down, if they need to, in order to get a better feel for the support and resistance levels that are critical. In the same way one would wade back into the long side, traders should always be taken in small increments so that a trader can get a feel first or test the water before jumping in.

4.) Inverse Funds – Unlike years past where only taxable or margin accounts could benefit from and participate on the downside, today a trader has the ability to utilize a vast array of investment vehicles in order to hedge positions or short the general market or specific sectors. These inverse ETF’s trade much like a stock and can be bought through any account furthermore, by taking the long side, it may break that comfort barrier that an individual has when looking to play the short side rather than the long.

5.) Embrace the Stock Picker – Regardless of a general market that may struggle or trend lower there are a few things to keep in mind. Despite a broad drop there will still be very powerful and long short-term up trends. A longer-term trend does not transpire overnight, rather a market goes through intermediate and short term trends within the prevailing longer term trend. During these times, individual stocks that possess the best fundamentals and or story, will produce incredible gains as traders pile into the select few stocks that act well. An individual trader can do extremely well, constantly being on the look out for these stocks and identifying their potential momentum ahead of the masses. Despite a general market decline, there will still be stocks that act extremely well and can be played on the long side however with smaller capital and lowered trust levels. During challenging market times, a true stock picker can still do extremely well.

We are still not at the point in which a new trend has been confirmed however we always have to be open to the possibilities and prepare accordingly. Rather than shun the action or grasp onto hope, as you may have done in the past, chose to embrace it, staying in control of both your financial and emotional capital along the way.