Many investors are asking where this market is going. That question is, unfortunately, impossible to answer. There were a few good points made by ma.mustillo, working_trader, and Geo_Effect, on this MartketSmith Blog, especially the point about focusing on the individual stocks you own, but the truth is that no one knows if this rally will end until it does.

Yesterday’s price and volume action were clearly negative, especially the reversal at new highs on the indexes. But the distribution day count is low, so we intend to try to hold our best positions (as of the time of this writing). That might require selling a few high-cost blocks of those positions to lower the average cost and make it easier to hold the position.

The reason we use charts to find low-risk entry points is exactly because of the current situation. When you improperly buy a stock that is extended, you pay for it when the market pulls back. The silver lining is that the big, liquid leaders are getting good support after the sell-off this morning. That is sign that the big institutions (who can’t turn on a dime) are defending their key positions. It also proves that being to identify leaders and buy them in the right spot on the chart, will serve you well in a good market, but also makes it much easier to handle a pullback properly.

When the outlook is murky, we fall back on rules. We are rules based investors because often times there is uncertainty in the market and we know from history that a sound set of rules can help guide us through rough patches. To mention a few obvious ones…

  • If you are downs 7-8% on a position, you should probably not have that position.
  • If you are heavily invested and/or in margin, without a profit cushion in the portfolio, you should re-evaluate your risk exposure.
  • Do not try and predict where the market is going. Let the price and volume action of the market indexes guide you.
  • Protecting your equity is paramount. As MarketSmiths we will always be there to invest another day. The worst thing and investor can do now is freeze up and not act when necessary.

Stay in tune with the market—and use your rules to get you through.

Best returns,

Scott O’Neil

President, MarketSmith Incorporated

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