Is Now The Time To Sell Your Winning Short Term Trades?

Stocks suffered their first substantial round of losses in weeks yesterday, as a negative reaction to the Fed’s last policy meeting gave traders a good excuse to sell and lock in profits from the current uptrend. The S&P 500 and Nasdaq Composite declined 1.2% and 1.5% respectively. Blue chips held up the best, as the Dow Jones Industrial Average lost 0.8%. The major indices closed at their dead lows of the day, indicating the bears firmly had control for a change.

Of more importance than the actual percentage losses was that the selloff was accompanied by higher volume across the board. Turnover in both the NYSE and Nasdaq registered 8% higher than the previous day’s levels. The higher volume losses caused both the S&P and Nasdaq to register a bearish “distribution day” that was indicative of selling amongst banks, mutual funds, hedge funds, and other institutions.

Wednesday’s heavier volume selling was a clear warning sign to take some profits off the table and raise cash, although our proven stock market timing model remains in “confirmed buy” mode. Nevertheless, we are not looking to initiate new positions going into today (February 21). We are content to manage existing positions and see how the market responds to yesterday’s plunge, as one or two more distribution days by next Friday would certainly force our timing system into sell mode.

Energy, financial, and construction stocks fueled the rally in the S&P 500 the past two months, and it was ETFs from these groups that put in ugly reversal bars yesterday. $KBE and $XES printed bearish reversal candles, while $ITB broke down on higher volume. The price action in these ETFs indicate that the S&P 500 may soon need a few weeks of rest.

As mentioned above, SPDR KBW Bank ETF ($KBE) closed with a bearish engulfing pattern on Wednesday. The candlestick was pretty wide, covering about six sessions worth of price action:

The reversal was a clear warning signal for short to intermediate-term momentum traders to lock in some profits, as the price action may need a few weeks of rest before it heads much higher.

Along with leading ETFs breaking down, we have seen some disappointing action in Chinese ETFs of late. The iShares FTSE/Xinhua China 25 Index ($FXI) failed to hold support of its uptrending 50-day MA this week, and is now breaking down below a recent swing low:

For ETFs and stocks we are stalking for potential swing trade entry, we keep an internal watchlist of setups that are moving in the right direction, meaning that they are above their respective 50-day moving averages and also setting “higher lows” within a base. Since $FXI is no longer above the 50-day or setting higher swing lows, we have removed it from our watchlist. It looks like $FXI will need at least a few weeks of base building before it can produce a reliable entry point.

As mentioned above, our focus right now is simply on managing existing positions. As subscribers to our stock picking newsletter for swing traders will note in the “open positions” section of today’s report, we plan to sell and take profits on most of our winning positions on today’s open, just to lock in some of the solid gains we’ve been riding over the past few weeks.

What do you think? Is it time to take some profits off the table? Drop us your thoughts below.