Guy Cohen

Protect Your Profits In Case of a Reversal

by Guy Cohen 19. March 2009 20:57

Hi Everyone

In this alert I want to briefly talk about how to protect your profits.

When we look at the major indices we can see that either we're about to reverse, or we're about to form a bull flag before resuming this big up move.

Remember, we don't predict, we simply let the charts guide us.

So, looking at the DOW first, we can see that it's stabilizing around the 7400-7500 mark.

Eight consecutive up days constitutes a long move and today's action was a much needed pause.  We don't know what happens next, but if you have any bull flags which are in profit and you still haven't taken the first bite yet, I'd take it.

It's much the same story with the S&P.

A number of stocks are forming right below their 200 day moving average and other potentially critical levels.

So, if you have a recent bull flag trade where you haven't yet taken your first profit, now would be a good time to do so.  Remember, sometimes it's prudent to take just a dollar or so for that first profit target, and then adjust your stop to near your entry point to ringfence your trade.  This ensures that you'll make money on the trade even if the stock turns against you.

Here's an example where simply taking your first profits at just below $14.00 would be prudent, even if you've only got a first profit of $0.50.  Not only is just below $14.00 a convenient area just below the round number, but also the 200 day moving average is lurking just above.  The stock could continue up, in which case you're in luck.  Or more likely it will come down, and if your raised stop is hit near the top of the flag (you raised it after you took your quick first profit target), then at least you still made money on the trade.

Over time you should develop a feel for the markets - that's just a question of you observing how the markets generally behave.

In the meantime I'll call what I see, and what I see right now is that the recent bound could be shortlived, even though I'm seeing a lot of lovely bull flags at the moment.  Because of that I'm being cautious and my bet is that many of these bull flags will roll over into rounded tops.  If this happens, then in about 2 weeks' time we should have a bunch of lovely bear flags again.

Not long to wait to see which happens.

All the best