Last Friday’s market sell off was nothing to “brush off” even though you will see CNBC analysts saying there is nothing to worry about. In fact the whole week was rough.
Take a quick read of my post on analyzing the overall market for dummies and you can see based on the chart below how we are entering what could be considered a downtrend.
Even if you are not an active trader that analyzes hundreds of technical signals and the economy, just by looking at the above chart you should consider the following:
- Start taking profits (if you haven’t already) and move to either strong cash or all cash in your portfolio. The market is not nearly as in good of shape as it was say in the end of September. Why hold onto your big profits when you know that 3 out of 4 stocks follow the overall market?
- Raise your stop losses. A stop loss order is like insurance, it is an order that automatically sells your stock position if your stock hits a pre-set price you setup. Selling out of part of your positions and then raising your stops to lock in profits is a very smart move.
- Stop Buying New Positions. With the market in this new downtrend you may not want to continue to put money into the market. The argument here is again about going against the grain. Don’t fight the tide, work with it. Don’t buy new positions when you have a high probability of failure regardless of the stock.
What will help us determine if this truly is going to be a lengthy downtrend is how the market leaders are performing and holding up. Stocks like Apple (AAPL) which reports earnings after hours today is a great example of this. If the stock falls heavily tomorrow that may be a sign of it breaking down. Other stocks to watch are Baidu.com (BIDU), Google (GOOG), and First Solar (FSLR).
As an independent trader you want to go with the flow, not against it. The market last week showed two distinct distribution days, which are days when the market sells off on heavier volume than the day prior. That is not supportive of a strong market, so don’t fight it.
The bottom line here is to keep an eye on the market leaders this week, and to start moving into cash if you haven’t already. Take some or all of those profits off the table and let the market tell you where to go next, not your ego.