A Real Rally This Time?

No one knows the answer to the title. However, the market has logged positive behavior and is in a rally. It's difficult to say how long or strong it will be, so just let it unfold as we go. If you see top rated stocks breaking out in higher volume, this will be an excellent sign.

If nothing else, it would be prudent to expect at least a brief, even spirited rally back up to key resistance and trend lines like the 50 day moving average. I first jumped in and bought June options one the SPY on June 6 and sold them today for a nice percentage gain. I sold because I held June options (I should have purchased July options) which expire Friday, meaning I had to make a move between today and Thursday.

Having said that, if you are a bold swing trader, a purchase on a slight pullback tomorrow may be a savy move if you are ok with short term volatility, which could present itself.

What does this mean for break out stocks, IBD style? Be cautious. If you are bold, take a small pilot position in a stock breaking out and see how it behaves. If the market improves and the stock rises on nice volume, maybe pick up a little more as long as you aren't chasing it (over 5% from buy point). I plan on doing this as soon as I zero in on a good prospect.

Be prepared for anything in this market, which means have stops in place and protect that capital. It's been a tough market and one could easily argue the path of least resistance in the long run is down. But markets have a way of fooling investors, so be open to the possibility that we could go higher. It may sound somewhat contradictory or noncommittal when reading this paragraph, but it's the reality in the market that conditions can change and you simply need to be nimble and ready to take advantage of this.

It's good to be aware of resistance and support levels, but don't prognosticate. Rather, anticipate and be a good listener and take what the market presents step by step. With stocks setting up in solid bases, know your buy point and be ready to act with conviction, and be ready to exit with as much conviction if you need to.

As IBD points out, all bull markets have started with follow through days, which we experienced today, but not all follow through days work out.