Reversal Day? Don't Panic

For anyone following the markets, today was a nasty one. The action on Fed days are always interesting but today was one of those that we would like to forget. This morning the action was strong on some dovish comments from Ben Bernanke and markets ripped to new all time highs. The afternoon however was not as favorable for the bulls. After the Fed Minutes were released at 11:00, markets reversed course hard and closed down almost 1%. Trading action like we saw today is what is considered to be a "key reversal day" where the market rises to a new high (higher than the previous days high) and then reverses and closes below the low of the previous day. The trading bar today on the chart is whats called a bearish outside day, a high above yesterdays high and low below yesterdays low; the entire action engulfs the prior days trading range. Typically this signals a turning point in an extended rally (which we are currently in).

Does this mean sell it all and hide under a rock? No it does not. But it also means that further caution is advised until we see how this possible turning point is handled by market participants in the next two days before the long Memorial Day weekend. Today I took some well earned profits on a few of my big winners, sold a couple of my lagging holdings and simply raised a little cash. I am still roughly 60% long and plan on using my newly freed cash reserves as new opportunities arise.

This market has been a tricky one since the introduction of QE. We just have not seen prolonged weakness on these typical technical indicators that usually signal trouble ahead. There are some signs that the market has run a bit hot here and today's initial surge kissed right up against the long-term weekly trend channel resistance. Does this mean we will see a sell off? Not exactly, but it does increase the odds that one may be nearing. However, I would not be surprised at all during tomorrow's trading session if the market just shrugs this one off again and continues to rip higher. Each time during this rally that I have taken some profits I have been made foolish by Mr. Market, frankly that's his job, to make the masses look like reactionary, impatient morons. But after the run we have had over the past 7 months, a breather would be a welcomed and renewing cleanse.

We still sit well above the breakout level of 1,597 on the SP500, so everything is still peachy as long as that level holds. It would be great to see a pullback that retests that key level as that would offer a fantastic risk/reward opportunity, but the market is rarely that forgiving. We will just have to continue to plug away and manage risk as best we can.

My recommendation after today's trading would be to look around your portfolio and trim off some gains on your larger holdings, sell out of your losing positions and get ready to put some new money to work once a new support base builds. I would not advise being less than 50-60% invested above the 1,597 breakout level. I still feel we are in a transitioning market environment with higher prices still to come, but I also feel that some more consolidation around these levels would help create better opportunities in the future.