Quite a turnaround today, eh? We went from bad to worse to just plain awful on Monday, only to recoup half of yesterday's disaster Tuesday. Still, though the market may have been able to overcome 'worse', Monday's move to just 'plain awful' - despite Tuesday's bounce - may have been a deep wound that won't be so easy to overcome. On the flipside, please don't add us to the list of the hysterical fear mongers; there's enough of that everywhere else you look. We've said from day one our goal was just to be a voice of reason, and that's not changed today. While everyone else is biting their nails and screaming gloom and doom, we're actually offering a sound strategy that will at least help you survive what's going on right now, and maybe even let you make some money from it. We're going to run down the key components of small cap stock trader's "Bear Attack Survival Kit", in a second, but first we need to note some things for a handful of our open trades. Portfolio News First and foremost, take a look at today's chart of VirnetX (VHC). Yeah, showing us some bullishness during a marketwide rally in itself isn't heroic, but this is more than just riding the tide after a needless drubbing. Today's bar is a high-volume, bullish 'inside day', which generally signals a major turning of the tide. The market can't get all the credit though. This was a 14% pop prodded by - you guessed it - a new patent. We talked about this idea at great length when we first unveiled VirnetX a few weeks ago.. the right patents at the right time are like a virtual ATM. As it just so happens, several of VirnetX's royalty-generating patents cover a technology that's becoming standard for smartphones and mobile devices. Well, the company got another security-related patent today. This stuff is not going away; it's only going to get bigger. You might want to take a look at our original take to really appreciate how VHC can cash in on its technology patents. In other news.... well not exactly news - just an observation. Have you seen how well Lihua International (LIWA) has held up during this selloff? I'm not talking about today; any stock could have made progress today. I'm just pointing out how LIWA has been totally unfazed despite the meltdown all around it. How's that happening? I've got a theory that it's a combination of "anything except the U.S." and "anything to do with China (again)". That's not to say Lihua doesn't deserve it though... there aren't too many stocks of any size with a legitimate sub 5.0 P/E right now. Whatever the reason, the relative strength alone is a major bullish clue. Finally, the relatively quiet (of late) Elephant Talk (ETAK) unveiled a huge joint venture with MECO Holding AG today. The two organizations are going to jointly launch mobile venture network enabler (or MVNA) platforms in several European countries. In simplest terms, a MVNA provides the technology and infrastructure for a cell phone service provider.... the backbone. No word yet on what kind of revenue this could bear, but we know the two companies are investing $50 million in the project. That's it for portfolio news. Now, about that gameplan for what's likely to be a few tough weeks.. It Ain't Over - Here's What to Do While Tuesday's bounce was impressive in size, we're really not all that impressed, you know? After a 17% drop over the span of twelve days, something had to give. And, once traders realize the Fed is just stating the obvious, the fact that we're still no better off than we were is apt to hit stocks again now that we're in bearish mode. In other words, stocks may not be ready to rock just yet. Here's how we'd handle things now. Small Caps First and Fastest to Move, for Better or Worse We love small caps and micro caps for one obvious reason - they offer more upside than any other market segment. There's a flip side to that coin though... they're also the most vulnerable when the market falls apart like it has now. The rising and falling tide lifts and lowers boats at the same time, but the smaller the boat, the greater the rocking. Just get used to the volatility. That much you probably know, but if not, there you go. That weakness may not actually be the biggest challenge for a small cap stock trader, however. Part of the reason - a big part - these small stocks get hit so hard when times get tough is the evaporation of liquidity. It turns into a buyers' market when sellers get desperate, so much so you may not find a market anywhere near what was a fair price when the broad market was on the way up. There's not a lot you can do about it if you're already in, but it should certainly give pause if you're thinking about getting in when the environment is tough; make sure there's plenty of liquidity if you're rolling the dice. On that note (and perhaps in contrast in some ways), small cap stocks perform first and best when the bullishness resumes. That brings us to point #2.... Don't Let Fear Blind You As investors, we have this little thing inside our head that wants us to seek public affirmation for our decisions before and after we make them. And, when the media is nothing but talk of recession and bear market, it's stunningly easy to support a bearish outlook. Heck, if we hear the message often enough, the media's panic may actually convince us of something we wouldn't think otherwise. Don't be fooled though. The media was pounding the bearish drum in August of 2010 before a monster rally, and pounding the same bearish drum in March of 2009, also before a monster rally. It was wrong on both counts. That's not to say we've already hit bottom; maybe we have, and maybe we haven't. That is to say, however, that the smart money - the investors you never hear about who are content to quietly make a fortune - love these panic-induced pullbacks just because they're great long-term buying opportunities. And to be clear, I don't mean long-term as in a few weeks. I mean long-term as in a few years. Simply put, you have to have the guts to go against the grain of the majority and buy GOOD stocks when nobody else wants 'em. Yeah, that's tough to do when everyone else is doing the opposite. These two data nuggets may help you get over the mental hump though. The majority of mutual fund managers (the 'pros') still underperform the S&P 500. The majority of self-professed 'traders' don't actually make any real money, even if well capitalized Point being, you should WANT to be in the minority. Think Outside the Stock Box While we're fans of individual stocks, there's time and place for options as well. This is one of those times. There are two ways to come out ahead with option trading in an environment like this one. One is simply to buy put options - which increase in value as a stock moves lower - at what appear to be market peaks. Yes, you could buy put options on individual stocks, but when volatility is this high that can still be a shot in the dark. The wiser way to make a bearish bet here is just by owning puts on indices or index-based ETFs like the SPYders (SPY) or the NASDAQ (QQQ). The trick is not getting greedy and trying to pinpoint the exact highs and lows. If you can scrape off a couple of nice double-digit wins with options while the market is losing money, that's all you can ask for. The other way to turn options to you advantage is to sell them (without even owning them first). This is a more involved strategy and may not be for everyone, but it can also bear a lot of fruit when played right. There are two ways to make this work. Sell puts on stocks you think are going higher, but you wouldn't mind being forced to buy if they happen to sink lower. This strategy puts cash in your pocket up front, but may require you to buy that stock at a pre-determined price in the future. If you're happy to own it for the long haul anyway, no big deal. Sell calls against stocks you already own. This also puts cash in your pocket upfront, but may require you to sell your shares at a less-than-top price in the future. Again, if you don't mind that risk, no biggie. If you're not familiar with these strategies, or even with options, I highly recommend learning as much a you can. OptionTradingPedia is a great place to start. Timing is Everything Feeling well-armed now? Good, but there's one more reality we have to digest about the current environment. With or without today, the market has spoken, and it's not happy... at all. It's not likely these bearish days are over. Oh, had stocks not gotten slammed Monday, there'd be a fighting chance of building a long-term rebound. After Monday though, we have to think any decent amount of strength like today's will eventually be met with another steep selloff. Ergo, don't be impressed if you see some more nice buying like today's - use it as a chance to scale out of the long trades you wanted to shed a few days ago, and use it as a chance to buy some of those index puts we talked about above. One day does not make or break a trend. And where are we ultimately going? These bigger-picture outlooks are the perfect use of Fibonacci retracement lines. I don't want to get into too much detail here, but simply put, each Fib line is potential support and resistance, but if broken, odds are good the market will keep moving to the next one. As it turns out, the S&P 500 is knocking on the door of a big 38% retracement at 1097; the index closed at 1119 on Monday. If it breaks, the next potential landing spot is a 50% retracement at 1014, which was also the floor during the summer-2010. (How does the market know?) If that line breaks, then 931 is the next stop.. a 61.8% retracement. For the Dow, the line in the sand is 10,427, versus the close 10,809. If that level snaps, then there's a 50% retracement level at 9671.... though frankly, the 50% retracement lines don't mean a great deal. If 10,427 breaks, the level to watch out for - and this is a little bit scary - is 8916. Here's a full-screen shot of the Dow and its Fibonacci lines. Now, there's a reason we're specifically pointing these Fib lines out. If you're a true long-termer, use these dips or each Fibonacci line as buying opportunities. Do NOT go in with new money all at once though. Break your long-term 'buy' money into four or five groups of 20% to 25% each. Put some in with the first dip (like Monday's), then put some more in on the second dip at or neat a Fibonacci line, put some more in on the third dip, and so on. That way you don't have to try and pick the exact bottom to get a nice price. Regardless of how you do it though, just know that we see more nasty pullbacks ahead. We're not going to cal it a bear market (yet), but the mindset is definitely a defensive one rather than an offensive one now that traders are completely rattled. Bottom line? If you don't have a plan or perspective, times like these can be stressful. If you have a plan, it's all just a matter of executing it. We just gave you both.