Overbought Market, how to navigate – July 2010

Market has been rallying for past several sessions in a row now. Whatever the reason might be, this is probably the toughest time to navigate the market. Again in such situations, cash might be the position to take for conservative investors.

Read on active trader

If you reached here, that means you do want to figure out how to navigate in the market like this. There are two common behavior that one can see in the market, well one of the two outcomes I am going to outline:

1. A sharp spike down
2. A period of consolidation

If you are a bullish on the market right now given all the positivity that is flowing through the news, you want to have a pullback on low volume. That will indicate a bullish move. That got to happen because people will start taking profits. However if there is panic selling, you know to get the heck out of the market and wait on the sidelines again.

If you are bearish investor right now, you are waiting for a major downward movement. You might be sitting on or planning to buy reverse ETFs such as SDS or might be buying put options!

Honestly speaking, I would NOT take the bear attitude just yet. Because right now market is extremely bullish, however the pullback is imminent. So you might want to just wait and see the magnitude of profit taking or selling. If selling is moderate, I would imagine that as a buying opportunity.

Make sure to book your profits

In a economy like this, you never know what is going to happen. No one can predicts a news item coming out of Europe that will take the entire market down again. So its critical to confirm your profits while they last and be ready to hit the market when you see the opportunities.

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