Keeping the Rally's Rewards

Two weeks ago I made the argument for a sideways market into the summer months. That forecast is on target after last week's failed attempt to break resistance at June 6 highs. Traders should shift gears now to take advantage of new opportunities. This means abandoning the strategies that were so profitable during the spring rally.

The amazing rally sucked in legions of inexperienced traders ("newbies"), as well as many battle-scarred veterans. In fact, discount brokers reported record volume as the retail crowd logged on to dormant accounts, hoping to grab their piece of the rally pie. Unfortunately, these folks now have targets on their backs but don't know it yet.

The good news is there's time to take cover before the missiles start to fly. We have one week left in the quarter and will likely see a window-dressing rally into the end of the month. But the beginning of July could bring large-scale changes in market direction.

Here's the problem: The spring rally made you feel a lot smarter than you really are. A perfect market storm let you make money in spite of questionable selection and poor risk control. In your mind's eye, at least, you got your act together and are now playing like a pro.

Keeping What You've Made

But it was all an illusion. The market is setting up the retail crowd for a very big fall in the coming weeks. In other words, you'll probably lose every penny you made since April unless you take corrective measures immediately. Greed forces the majority of market players to forget important lessons of the past.

One thing that separates professionals from the public is their ability to shift gears when markets change. Contrast this adaptive style with the retail trader who throws money at corrections because that's what worked on the way up. Invariably, these folks burn so much capital that they either finally recognize the problem or wash out of the markets completely.

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Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At the time of publication, Farley had no positions in trading vehicles mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to [e-mail]. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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