Why I think the January high is significant
Last Wednesday I noted that some areas of the market had pulled
back sharply and were quite oversold. I suggested a bounce was likely to occur
“in fairly short order.” Thursday we saw that bounce as the market moved up
nicely on good volume. I also noted Wednesday that it would be important to
monitor the action of the bounce to clue us in as to whether the market was
ready to begin a new leg up. Friday answered that question quite nicely. Monday
did nothing to make me believe the selling is over. Here are my thoughts.
I suspect the January 11th top may turn out to be
significant. Support levels should be watched closely. Strong closes below them
would serve as confirmation that the market is entering a downtrend of some
degree. As I’ve noted in this column for some time, the market has not had a 10%
correction since it began rallying in March 2003 – a very long time to go
without one. The longer we continue to creep higher, a la 2004-2005, the greater
the risk of a significant selloff. Therefore, I believe a little extra caution
is warranted.
How would I apply this extra layer of caution? On
the long side I would begin taking a larger percentage of profits “too early”
and a smaller percent of profits “too late”. (See my Jan 4th column for a more
detailed description of profit taking techniques.) I would also begin getting a
bit more aggressive on the short side – looking for entries when the market
bounces like it has been doing for the last day and a half (this article is
being written Tuesday mid-morning). Nothing is dire yet, but a more market
neutral approach with tight stops and some quick profits until direction is a
bit more clear seems reasonable.
Best of luck with your trading,
Rob
For those who may be looking to expand their
knowledge beyond just market timing, my
Hanna ETF Money Flow System utilizes the VIX in generating trading
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Rob Hanna is the principal of a money
management firm located in Massachusetts. He has spent the last several years
developing and refining methods for trading in stocks across multiple time
frames. He selects stocks using both fundamental and technical criteria, and
then trades them using technical analysis techniques.