Uptrend Intact, But Caution Remains

by Darrin Donnelly on January 27, 2011

Click on chart to enlarge.

Click on chart to enlarge.

A three-day winning streak on the NASDAQ this week has last week’s sell-off looking more like a minor pullback than the beginning of a market correction. 

The market’s ability to snap back this week (with consecutive accumulation days on Tuesday and Wednesday) and already close the gap created during last Wednesday’s gap-down decline is very encouraging. 

Still, we need to remain somewhat cautious as last week’s selling came on heavier volume than we’ve seen so far this week and the distribution day count remains at three.  Four or five distribution days in a one-month period usually signals the beginning of a downtrend.   

How should you trade in a “cautious” market stage like this?

First and foremost, always trust your trailing stops.  If a stop is hit, exit the trade with no questions asked and no rationalizations.  This is NOT the time to give your stocks extra leeway.

You also need to be aware that new leaders are stepping up to take the place of the previous leaders that are falling off. 

Last week, the cloud computing stocks were absolutely crushed following FFIV’s earnings report.  While these cloud companies are still growing fast and showing all the fundamentals we like to see, they broke down technically and triggered sells across the board. 

You can’t argue with the technical action.  These cloud stocks need a rest and new growth stocks have already stepped up to take their place.  You need to be extremely selective in this type of market and make sure you’re only trading the very best stocks.

Another technique for trading in a “caution zone” is to take smaller positions than normal.  If you normally initiate a position with $10,000, consider an initial position of $5,000 or $6,000.  You can add to your position as your stock climbs and the market confirms its strength.

Now is not the time to aggressively load up on margin and if you’re sitting on some major profits, don’t be afraid to sell a small portion of your position and lock in some of that profit. 

Above everything else: trust the stops on your current stocks!  You can do all the market analysis you want, but ultimately the performance of the stocks you are holding will tell you what to do next.

For the exact buy and sell points of all our Darvas stocks, check out the latest issue of Darvas Trader PRO.

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