Good trades and low-risk investments are drying up after the seven-week rally, which is no surprise considering the vertical trajectory of the uptick or the lack of orderly pullbacks. It's a tough spot if you're loaded up on the long side and exposed to the vagaries of an overbought market. But there's no need to panic because there's still time to protect your hard-earned profits.
Fresh buy signals should come if we retrace at 38% to 50% of the post-February uptrend. That correction, if it occurs, should take at least six weeks and encourage bears to growl loudly after their long hibernation. Keep in mind that dip-buying strategies have worked poorly in the last year because every downturn has turned into a full-scale selloff. So we won't know if it's really different this time until support holds up and the market recovers to new highs. That uncertainty makes the next downturn a major challenge because healthy pullbacks and unhealthy downtrends look the same until hidden buyers find their levels and come off the sidelines. Are you prepared to watch your positions drop five, 10 or 15 points in the next few months? If not, now is the time to take some money off the table or pick up options protection to carry you through a corrective phase. In addition, you need to find the price level on each position where you're no longer willing to hold on and take the pain. In most cases, this exit door should be located above your original entry so you can pocket a little money for all your efforts. The best plan after you've found this magic number is to place a stop order at the level right away so you're not tempted to hold on if the stock drops toward it a week or a month from now. Then let the market gods decide the fate of those investments. Use the freed-up cash to make a laundry list of stocks you'd like to own at lower levels. Be conservative in your pricing methodology and consider just how far your favorite stocks might drop in an adverse market environment. As a technician, I seek out unfilled gaps to find my entry targets, with the understanding that most gaps will eventually get filled. A corrective period will make newly minted bulls uncomfortable and force them to question their faith in the brave new world that began in early March. I recommend you keep the big index numbers in front of your nose at all times. This will lower the emotional fire and give you the courage to hang on when negative sentiment hits the ticker tape.