SubscribeMarket Index: Signs of a Pullback
Today, many of you probably tuned in television, radio, or internet only to find what President Bush would describe as a “thumping” in the market. You have to admit we have witnessed a strong market and been complacent and unrealistic about a broad pullback in some of the major indices and stocks across the board.
I am not saying that this setback will last forever or that you should be worried because I know the long-term prospects of the market are very appealing. However, form time to time we should expect the market to take a breather and let some of the profit taking naturally run its course. For every two steps forward we must take one step back. But for the short-term investors whose profit rely on timing the market, could we have see this coming?
Well you know that my answer is an obvious YES!
For example, just look at this chart of the Dow Jones Industrial Average. This was originally a 6-month daily chart, but due to space limitations on this blog I have cut it down to about four months, showing you exactly where the signal was given that maybe you should have taken some profits before the institutional and public investors had a chance to pressure prices down.
Source: Bigcharts
This is another scenario of a negative divergence. Look towards the end of the chart where I connected to ascending points of the Dow. Directly below this, both the MACD and the RSI indicator at exactly the same point in time declined. With descending point on the MACD and RSI, this was the conflicting signal we were looking for. Momentum was shifting in favor of the bears and the majority of investors had not yet caught on to what the insiders were doing.
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Comment by Loi Tran on 28 November 2006:
I’ve been selling a lot of my stocks lately because many of them hit my sell target. There aren’t many good buys out there, so a lot of my money is in cash. I do not know anything about technical analysis, but when there few buying opportunities, stocks look overvalued. I’ve been waiting for a correction so that there will be more buying opportunities. I welcome corrections.
Comment by Stephen Oakes on 28 November 2006:
Hi Loi,
Thanks for your comment! If you do not mind me asking, how were you able to place price targets in such a way that you were able to liquidate at the right time, without using technical analysis?
Your answer might help other investors out there who are looking for ways to spot warnings of a pullback in the future.
Comment by Loi Tran on 29 November 2006:
Hi Stephen,
I usually set my sell 10% above my buy price. Once it reaches that point, I set a trailing stop on the stock or just sell it outright depending on the stock and hold period. My trading strategy is to try to turnover as many stocks as possible by trading high quality beaten down stocks and selling them when they go up. I’m following Steve Selengut’s strategy (www.sancoservices.com). The market has gone up a lot in the past few months. A lot of my stocks reached my sell target, so I sold a lot of them. About half of portfolio is now in cash, but I am slowly adding new attractive positions.
The high turnover is not good in a taxable account because taxes eat into the profits.
Comment by Stephen Oakes on 29 November 2006:
Loi,
Thank you for sharing your system in regards to managing profits. Although it is important to come up with an investment strategy that fits your style and works for you, there must be emphasis placed on how you will sytemmatically control a loss or a gain. A system that is consistent and blocks out emotions in regards to decision making. I wish you the best of trading and hope to see you back our blog very soon!
Stephen