Attention Traders: Take Profits or Tighten Stops

by Sam Collins | July 2, 2014 2:28 am

The market rallied Tuesday, fueled by investor confidence that stocks remain attractive due to corporate profit growth versus mediocre returns for other investments.

The blue-chip Dow industrials rose triple digits to a record intraday and closing high just shy of 17,000. The Russell 2000 hit a new all-time high, and the Nasdaq logged new 14-year highs.

Technology and health care stocks outperformed. iShares Nasdaq Biotechnology (IBB[1]) rose 2.4%. Netflix (NFLX[2]) jumped 7.4% on an upgrade from Goldman Sachs (GS[3]). And 3D Systems (DDD[4]), a recent Trade of the Day recommendation[5], rose 6.1%.

But the economic picture was not so bright. The Institute for Supply Management’s June manufacturing index fell to 55.3 from 55.4 in May, missing forecasts of 55.8. And construction spending rose less than expected in May.

At Tuesday’s close, the Dow Jones Industrial Average jumped 129 points to 16,956, the S&P 500 rose 13 points to 1,973, and the Nasdaq increased a healthy 50 points to 4,459. The NYSE’s primary market traded 686 million shares with total volume of 3.2 billion shares. The Nasdaq crossed 1.9 billion shares. On the Big Board, advancers outpaced decliners by 2-to-1, and on the Nasdaq, advancers led by 2.7-to-1.

Nasdaq Chart
Click to Enlarge

Chart Key[6]

The Nasdaq broke out to new 14-year closing and intraday highs Tuesday. Many believe that because the index has reached less-charted territory, higher prices are automatic.

The higher opening also supports the theory that the 4,350 to 4,372 support zone demonstrates a successful test of that area. And the internal MACD indicator supports higher prices as well.

RUT Chart
Click to Enlarge

The Russell 2000 also spiked to a new high with a bullish MACD indicator. But note that at least four prior spikes were followed by significant profit-taking even though they were supported by a strong MACD.

Conclusion: Yes, we’ve had a great start to the second half of the year. But in a holiday-shortened week, with lower-than-average volume, I am loathe to chase the bull. I suggest traders either take profits now, or place solid stops in order to protect profits without missing a further run higher.

The other option is to hold your gains and wait for a solid negative technical signal. However, this is the most dangerous strategy of all, since others are looking for a sell signal too, and a rush for the exits most often fails to let everyone out in time.

The above advice is for traders only. Long-term investors should hold their gains and buy on pullbacks. The bull is charging, but exhaustion may cause him to stumble, and if he does, your cash reserve can be put to advantage by bargain hunting.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[7].

For a list of this week’s economic reports due out, click here[8].

  1. IBB: /stock-quotes/IBB-stock-quote/
  2. NFLX: /stock-quotes/NFLX-stock-quote/
  3. GS: /stock-quotes/GS-stock-quote/
  4. DDD: /stock-quotes/DDD-stock-quote/
  5. a recent Trade of the Day recommendation:
  6. [Image]:
  7. click here:
  8. click here:

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