Tomorrow brings us to another weekly close, which I anticipate highly. There was some sharp divergence yesterday between the Dow and Transportation Averages, which led into today's stupendous rally in the Dow 30.
Well - we were correct (albeit cautiously). Buying the last dip was the way to go (I put my money where my mouth is and picked up some shares of Potash corp on the last dip). Buying the next dip, which will come shortly, should also prove wise unless something changes in the fundamentals of the Dow/Trans relationship (it's possible!). So if you waited on the sidelines, you still have a good chance of catching undervalued shares of quality companies.
With that being said, this rally as it stands will lose it's legs - it has to - because the Dow just topped a previous intermediate cycle high on both the weekly and the daily charts. So would we buy NOW? Absolutely not. A sharp correction is coming, so stay put with your cash. Taking some profits now, if you have them, may even be a good idea - especially if your mindset is that of a trader rather than that of an investor.
Regardless, we would say that if you are up by 30% or more on any position, it would be a good time to either take profits (on core holdings), or to cash out on your initial investment and start looking for another opportunity (on speculative holdings).
How can we be so sure of ourselves here? Because the Transportation average didn't confirm the Dow's move today by topping a new intermediate high. Simple as that.
What to watch for
A close below 4795 on the transportation average would be incredibly bearish, if the Dow closes below 12101.46.
