What's Your Strategy For Protecting Gains?

The (SPY | Quote | Chart | News | PowerRating) closed at 102.84 on Friday, then opened at 103.04 yesterday and traded up on an expansion of range with a volume increase, and there was nothing resembling a Trap Door until the SPY hit 103.77 on the 10:20 a.m. ET bar. There was a flurry of early news, like the (IBM | Quote | Chart | News | PowerRating) upgrade, Barron's article on the drugs as value, etc., in addition to my favorite: the upgrade of the semiconductor equipment stocks by Smith Barney to "overweight" from "market weight." Hello. For the last six months as the SPX ($SPX.X | Quote | Chart | News | PowerRating) made its retracement bottom in March, this sector was number 2 out of 214 sectors and up over 130% for the past six months going into yesterday's trading. It's the "sell (INTC | Quote | Chart | News | PowerRating) at 15 and buy it at 30 syndrome" to cover your --- and chase price. After 10:30 a.m., all of the major indices trade sideways for the remainder of the session, and the SPY closed at 103.68.

Throughout the early up move, all of the major sectors were green, except for the RTH, which was red from wire to wire. NYSE volume was 1.3 billion, the volume ratio 78, breadth +1235 and was better than +1000 all day, so that's very positive. The SPX closed at 1031.64, +1.0%, while the Dow ($INDU | Quote | Chart | News | PowerRating) was +0.9% at 9586. Also, helped by the hyped up commentary on the tech sector in general, the Nasdaq ($COMPQ | Quote | Chart | News | PowerRating) at 1889 and the (QQQ | Quote | Chart | News | PowerRating)s at 34.46 were +1.6% and +1.5%, respectively. In the major sectors, the (PPH | Quote | Chart | News | PowerRating), on significant volume, led at +2.7%, while the (BBH | Quote | Chart | News | PowerRating) was +2.6% and the (SMH | Quote | Chart | News | PowerRating) also +2.6%. Based on the big volume day for the SMHs on Friday, the upbeat semiconductor news must have had a sneak preview for some of the Generals last week.

For Active Traders

From a daytrading standpoint, early up and then sideways for the rest of the day, or vice-versa, is not what you need because of the chop. The initial two short trades in the SPX you might have taken each declined just a little over 20 cents on the SPY before reversing up, so you were forced to scratch the trades. There weren't any significant retracements to get you involved on the long side, so unless you caught some individual stock setups by scrolling your intraday charts, or a scalp, it was lean pickings yesterday.

I have included a weekly SPX chart since the 1553 high through the current bear market lows of 776, 769 and 789, which highlights some key upside awareness levels which include:

1. The .382 retracement to 1553 from 769 at 1068.
2. 1070, which is the price objective from the three-month 1015 to 960 box breakout.
3. Above that is the approximate 1110 - 1125 head-and-shoulder price objective measured from 930.
4. The 1160 level, which is the .50 retracement to 1553.

From a longer-term index proxy position perspective, which most of you have in your IRAs, you have nothing to do except watch with the SPX trading above all of its rising 10-, 30- and 40-week EMAs, along with, of course, the 12-month EMA. In addition, price is now trading above the recent three-month trading range box, so until something alters the situation, you're looking really good on a mark-to-the-market basis.

However, that is not my thought process for aggressive position traders who bought this market on the 789 retracement to 769, which is a 1,2,3 higher bottom and also an RST. The biggest risk is losing what you have made to date, especially since the last positive year was 1999. So, this corner will take steps to do just that if the SPX continues to trade higher above 1050 on the SPX. SPX gains at that point at 1050 would run from 35% at the lows to 31% based on the SPX at 800. It would be about +25% for those that got in around 840.

One way to accomplish this is to utilize index put protection, as implied volatility is now at the low end of the range. Simply put, my experience and how I define risk tells me I would rather pay for some insurance where if the SPX goes up, for example, another 30%, you could only participate in 23% of that move. Would you really care? But if it goes down 30%, you only lose, for example, 7.0% of the substantial gains already made since entry at substantially lower levels, especially if you are in the QQQs.

There are several ways to reduce the cost of insurance, but are only for those with a substantial option education and experience, so don't get involved unless you are one. Some hedge funds trying to lock in a good year should be doing this, since it's been a while since they've had happy investors. Most people freeze in the headlights trying to market time a decision like this if the market heads south, so this is one way to take the emotion out of the decision. If you are not qualified to utilize option strategies, then don't, says "Yogi Berra."

Have a good trading day,

Kevin Haggerty