Caution Required

This week was a week of distribution after the recent breakout failed. Notice how the down days are accompanied by hi volume spikes. These are clearly distribution days and can be expected after the run up we have seen since the follow through day on September 1st. Of course the question now becomes are we at a market top and is it time to take some big profits? As I always remind you nobody knows and don’t let people fool you into thinking they do. All we can do is apply money management and risk control as always and the rest will take care of itself. We don’t need to guess what the market will do next since that would be a fool’s game.

The Dow Jones Index shown in the graph below courtesy of http://www.bigcharts.com/ clearly shows that we have had quite a run up with very little in the way of pull backs. The index has moved well above its 50 day moving average indicating it is oversold and needed to pull back at some stage. In a market trending up it is not unusual to trace back to the 50 day moving average before moving higher again. A touch of the 50 day moving average by the index often indicates a break down or bounce back is likely. Bad news is when the index cuts down through the moving average on volume, which we haven’t seen yet. In fact it has bounced off the moving average back up so all is not yet lost, we need to watch the action around these levels.

At this point we need to see the index pick up in volume as it moves higher. If it moves higher on low volume that is not good news and we can expect another test of the moving average.

Coming back to the money management and risk control now is not the time to be buying new stock positions until the trend has reaffirmed itself if indeed it does. The plan should be to start tightening up on your sell stops to lock in some of those profits and as always follow the progress of the individual stocks you own. If you have a stock that has consolidated sideways and breaks out on high volume again then by all means buy more of that stock but do not initiate new positions at this point in time on new companies.