Profiting From the Market of 'Infinite Up'

By L.A. Little  FEB 14, 2013 9:05 AM

As the warning signs continue to increase, traders and investors should seize the opportunity to book gains into strength and repurchase on weakness.

 


Profits really mean nothing until they are booked, and book them you must. It’s hard to believe that over two weeks have passed since I first suggested taking some profits. During this time, the Dow Jones Industrials (INDEXDJX:.DJI) are only about 100 points from where they were back then. It seems like an eternity and 1000 points ago, but reality and perception are truly two different things.
 
The market of "infinite up" seems to be doing what it does best, and that is persuading each and every soul that selling is evil, and that to buy is the ticket ,and to hold is the winning combination. Unfortunately, it just doesn’t work that way on a longer term basis. Sure, the market can exhibit these extended runs, such as price appreciation that never seems to stop, but in the end, it always does. In the end, even in this world of infinite QE, there is ebb and flow.
 
The past few weeks, we witnessed day after day of dip buying, but we also witnessed the completion of many ABCD price projection patterns to the upside. The S&P 500 (INDEXSP:.INX), for example, completed its run for the roses yesterday at $1524.
 

Source: www.stockcharts.com
 
The Nasdaq Composite (INDEXNASDAQ:.IXIC) came within a stone’s throw of finishing off its target as well, but more importantly, it finally tested the highs from September of last year and did so with much lighter volume and was sold back down. That is a test failure at the highs.
 

Source: www.stockcharts.com
 
Now these aren’t signs of an apocalypse, but they are signals -- and they are not the only ones. The push higher has been led by financials and chips. They both finished off their ABCD targets as well the past two days, and the lists go on. In fact, unless you move to the long-term charts (monthly time frame), there are just a handful of ABCD patterns left. Three weeks ago, there were about a dozen, and at the start of this run, there were three dozen or so when considering the indexes, sectors, and auxiliary markets.
 
The point of this short article isn’t to suggest that one has to short the market. If you are nimble, that’s certainly an option. But as a trader and an investor, you have to seize the opportunity to book gains into strength as the warning signs continue to increase so that you can repurchase on weakness. That is where we are, and that is what I am doing.
 
I know it seems like this price escalation will never end, but it will -- and the rate of increase has definitely tailed off already, so take a hard look at what you own and do a some selling and book some gains. When prices do retreat, you can take the booked gains back out of your pocket and buy shares cheaper once more.

Twitter: @tatoday
No positions in stocks mentioned.