Now that market strength has become more obvious, many investors (including myself) are feeling the desire to move more money into the market. If you are buying, I caution you to make your entries surgically precise and avoid adding to positions extended 3% beyond the pivot point. The confidence created when the NASDAQ is up 9 of the last 11 days can get you into trouble.

Even in strong bull markets, we avoid buying stocks extended since we know roughly half of the breakouts that lead to success will retest their buy points before launching higher. Usually stocks pull in temporarily and get support before really taking off. (See MNST 2005 example above)

If you feel like increasing your exposure in step with a strengthening market, I would create several types of watch lists. Smart opportunities to initiate positions (read: not extended) will present themselves, and you want to be ready for anything.

• Stocks approaching pivots – There are still a number of stocks that have not yet broken out or run up. You can identify stocks that have been correcting or moving sideways for at least 5 weeks and are now approaching their previous highs. It may be safer to purchase these stocks as they push through their pivot points. If you chase stocks above the pivot point, you may regret it later.

• Stocks that have already broken out (TSCO for example) – I wouldn’t initiate or even add to positions in these stocks at this point. If and when these stocks pull in to retest their previous pivots, a sharp chartist may be able to add if the support is there. Mark on the chart the original pivot and watch as the stock pulls into that level. If volume begins to drop as the price approaches that level then picks up as it bounces off, it may be a good place to add shares.

• Short setups (CRM, CREE for example) – Personally I think it’s unlikely that the market will completely break down at this point…but that card is still in the deck. You can’t ignore the number of great-looking short setups. I’m still tracking them in a watch list (just in case).

2012 has the potential to be a good year as long as we are patient and precise. If you bought stock over the last few weeks, you’re probably better off sitting tight with your lower-cost positions rather than trying to add to them. If you are taking new positions, use strict discipline. Keep in mind there are still plenty of domestic and international issues, meaning volatility can return at any time. Assemble your watch lists, stay cautiously optimistic, and be prepared for anything.

Stay safe, best returns,

Scott O'Neil

President, MarketSmith Incorporated

Follow Scott O'Neil at Twitter.com/WScottOneil