After watching the market log its largest one-day gain ever and trade up 11%-12% on Monday, Oct. 13, you might have gotten giddy about your bullish positions. Or maybe, after some more convincing by the media, you’ll feel comfortable enough to take NEW bullish positions.

Think again.

Perhaps the market saw its absolute bottom on Friday, Oct. 10, or perhaps not. And I’m sure the market can — and likely will — trade up some more, but this is not the play you want to bet the ranch on.

When a market drops significantly like it just did, there is almost always another low that’s made at about the same exact level. Sometimes the second “leg” lower is slightly higher. But smart investors won’t feel comfortable enough to plug big money in the market until they know that there are new buyers at the lower levels.

The first bottom is made by short sellers “covering” their shorts. What that means, in a nutshell, is there are lots of big investors that profit when stocks move lower. The way they do it is to first sell (short) the stock, and then to buy (cover) the short stock at a lower price, profiting from the difference.

This bottom is found initially because of the buying pressure that’s created when the short sellers buy their stock back (and make enormous profits). Once that happens, more and more new buyers come in because they feel safer. But they feel safe only because they see the market moving higher. Smarter investors don’t feel safer until the last low is tested again.

At some point, the market turns around and comes back down. The question the media and traders will be asking at that point will be: “Will there be another leg lower, or a test of the bottom?” That’s why, you have got to take some bearish positions when the market makes the next intermediate top. The odds are stacked heavily in your favor!

Please don’t make the expensive mistake everyone else is about to make!

You may have read my article titled, “Read This Before the Bailout Arrives” where I decided that I would share the market commentary that I sent to members of my trading service, The Trend Rider.

I wrote the commentary on a Sunday after watching the Dow Jones Industrial Average rally about 1,000 points in just two days because it was manipulated higher by the SEC restricting short sales on over 800 stocks, and in anticipation of the, then, $700 billion bailout package.

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It’s easy to get too wrapped up in what we call a “bear trap” as people buy into an advancing market worrying they will miss buying at the bottom. That’s why in the commentary following the 1,000-point gain, I told Trend Rider members and then Tycoon Report readers, “it’s more likely that the market makes another leg lower than the one we’ve already seen.”

What I’m telling you is we have got to go lower again. Please don’t watch the market trade up for a week or two (or three) and start sending me e-mail about how wrong I am. It seems most investors are short sighted.

The blue arrow shows where I told you not to buy into the exciting rally. As you can see, the market lost 30% after I gave that warning. Of course it would have been cool to buy at the absolute bottom, but is it worth the risk?

I will say that this recent bottom is way more likely to be the absolute bottom. But to own bragging rights, you have to have bought on Friday.

Didn’t do that? Well, I’ll tell you where your next chance to own the rights will be — It’s not going to be on bullish positions over the next few weeks. The rights are found at the next top if you get bearish. You’re better off playing the odds that are in your favor. (At the very least, you may want to lighten up on some bullish positions that you’ve been holding on to, before the next decline to the recent lows — or lower.)

Where Is The Next Top?

After support levels are violated, they become the most likely resistance levels. So in the chart below, I show you where the market will most likely find it’s next resistance level. Looks like we will likely find resistance at about 10,400 – 10,500. That’s only another 11% of upside. (Only, ha! That’s like saying gas is “only” $3.)

Look folks, I know I’m not a fortune teller here. The goal is to be right MOST of the time. The analysis you’re reading now is based on history repeating itself over and over again. And if history is any guide, the odds are very good that we find resistance somewhere neat 10,500, and odds are we get another sharp sell-off.

I may be wrong, but if you’re trading, the name of the game is to go where the odds are in your favor.

Maybe we find another bottom in a month or maybe a week, but the next bottom will likely be at least near the Oct. 10 low. If things are bad, and the market plunges through that low, people who own put options are going to hit a home run.

And even if you only have a little bit of bearish exposure, it’s gonna feel great, especially if we haven’t seen the bottom!

Chris Rowe is the Chief Investment Officer for Tycoon Publishing’s The Trend Rider. To learn more about him, click here to read his bio.