The markets seldom move exactly as one expects them to move. A few weeks ago, when the S&P 500 was trading at 2800, I was wondering if the move higher had exhausted itself (see Shakeout before higher?). It seems I was a bit too early, the S&P rallied a bit further, to 2860 on Thursday. This was just a day before we saw a nasty reversal with the close at the above mentioned level 2800.

At first Thursday’s price action looked constructive to me. There were quite a few breakouts out of solid bases, the market convinced everyone into believing it can continue moving higher for longer with very shallow pullbacks. But then, on Friday, reality struck and we realized the market fooled us. Most of the breakouts failed hard, and as it seems, most likely marking a short term top.

As stated many times before, I believe we are/were most likely in a cyclical correction and not rolling lower into a full blown recession. However, the key is in managing risk, so don’t be stubborn.

Sometimes you need to do the hard thing, meaning reducing the exposure in your favorite stock position. If it continues moving higher without you, so what. We’re here to make money and to protect our hard earned capital, not to be right. If the market continues to move higher you’ll have chances to get in again or to buy another one.

Here’s a daily chart of the S&P 500 index.

We just saw a 22% rally from the December’s low. It would not surprise me at all to see a 10% correction. Could we see some kind of a retest of the low? This would make the bottom a more typical one (see Typical bottom).

If you wouldn’t be able to withstand that it makes even more sense not to be stubborn, so manage your risk accordingly. However, I still believe stocks at lower prices could potentially provide great buying opportunities.

ChartingTrades.com is a blog of CT Capital Ltd.

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