For a number of years the biggest challenge for traders has been playing effective defense. Those who rush to protect gains and cut losses at the first sign of trouble repeatedly find themselves poorly positioned when the market bounces back as if nothing happened. The bears simply can't build on downside momentum. The dips are always buying opportunities rather than warnings that the character of the action is shifting. One day that will shift and cause damage, but it doesn't look like that is going to occur today.
The action today is a good example of how aggressive traders may start to think it is time to be more cautious. The indices are sluggish, although holding support, breadth is poor and there have been a number of big picture issues popping up.
It is quite easy to make a case for some sort of corrective action and many big-picture pundits are doing that, but time and again the market bounces right back from as if nothing has changed.
There is no simple way to deal with this issue. If you try to anticipate further downside, you end up being a victim of a market that has no memory. On the other hand, if you ignore warning signs, you are taking on an increased level of risk and that may end up being far more costly.
I find the best way to deal with this is to focus on my individual positions and to let them determine if I should sell. If something breaks support, then it is gone even though the indices may be fine. A few stocks I have right now -- Acacia Communications (ACIA) , Momo (MOO) and Weibo (WB) -- have showed signs of weakness, but not enough for me to sell them. If the market continues to act poorly then these stocks will most likely reflect that fact and will be sold.
There isn't anything overtly wrong with the market right now but that lack of energy does raise concerns. It may be just another dip buying opportunity but we need to consider the possibility that something negative could develop.
