Now that we have a sell signal from Market Breadth Ratios, what should we to do with our stock holdings?

We got a sell signal from Market Breadth Ratios, though the long term uptrend is still intact.

In times like this, what should we to do with our stock holdings?

Answer: This is the time to sell stocks from your holdings where the price action is not performing well, in other words the price action is showing weakness.

Some of the sell rules are:

a.       The price has gone 8% below buy price.

b.      The stock price has broken down on high volume.

c.       The stock price is forming a “wedge”. A “wedge” pattern is when the stock price goes down, then tries to rally up but the rally is anemic.

d.      If the stock price has had a long advance and then closes below 10-week moving average and stays there for 8 to 9 consecutive weeks.

Money from selling these stocks should be invested in the remaining stocks in your portfolio when the Market Breadth Ratio gives a buy signal again.

The thing to remember is that a short term correction can turn into a long term correction. The technique employed here to weed out weak stocks and not put that cash back into remaining stocks, till we get a buy signal from Market Breadth Ratios. This methodology will have the effect of getting us more and more into cash as the short term correction proceeds. In case the short term correction turns into a long term correction or a bear market, we will already be holding some cash and thus not get a big downside hit to our portfolio.

The market price action did not act well today

The market did not act well today. It was high in the morning and then it dropped towards the end of the day.  This kind of price action in the market is not a good sign. It is possible the market may show price weakness for a short while.

We do have a long term uptrend in place. The Market Breadth Ratios have not triggered a sell signal yet.

The current market correction is over

The daily price chart for SPY (S&P500 ETF) is showing a strong price pattern for upward movement of prices. This changed in the last two days because of the price action we had on this ETF, since April 25, 2012.

On the Market Breadth Ratios we went from a “Sell” signal to a “Buy” signal with 15 trading days. We got a “Buy” signal on this chart on 4/26/2012.  This correction happened in a long term uptrend on S&P500 and Russell 2000 (representing the big cap and small cap indexes).

With the current correction being over we should buy good growth stock, with prudent risk management. Investor’s Business Daily is a good source for getting ideas on good growth stocks. They have lists like IBD 50, Sector Leaders for generating ideas about stocks showing strong fundamental and technical characteristics.

Beginning of the end of the current correction has started

The beginning of the end of the current correction has started. However the current market correction is not yet over.

The daily price chart for SPY (S&P500 ETF) is not showing convincingly that the correction is over.  We should wait a few days to make sure that the price pattern is not a “wedging” pattern.

The long term trend in both S&P500 and Russell2000 is still up. The medium term correction we are experiencing could be over soon. We just need to wait and watch the market. We can start to commit some money to the market (with very tight risk management), but wait to commit more fully till we get a clear sign that the correction is over.

Market correction is still underway.

Correction which started for S&P500 index on 4/2/2012 is not over yet. Market Breadth Ratios have deteriorated (see chart below).

The long term trend in both S&P500 and Russell2000 is still up. We are experiencing a medium term correction in a long term up market.

We need to wait out this correction before we commit any money to the market.