The comments below were provided by Kevin Lane of Fusion IQ.

The market is a bit extended here without any pullback; however, as our sentiment suggests (see charts below), liquidity remains favourable in terms of the intermediate to long term. So how one chooses to play this really is more about one’s trading/investment style.

There are several options: firstly, those who are more flexible may choose to put on some short exposure by shorting some index ETFs (such as QQQQ or SPY) or buying some inverse leveraged index ETFs such as the QID (which has corrected from $71.00 down to $35.50 (at its recent low) without so much as even a bounce).

Secondly, others may just choose to ride out what we believe may at present to be a normal, healthy and needed pullback.

And last but not least, yet others may use the weakness (should it materialise) as a buying opportunity.

In the words of famed market analyst Ralph Bloch, ”If we could make the market do our bidding”, we would prefer to buy some leveraged inverse index ETFs, see a 5–7% pullback, then unwind those at a profit and then buy back into select longs for a move up to our 950 S&P 500 target.

However, we know these dream trades, where everything works out exactly as you plan, don’t unfold to often if ever!

But for the record we like being proactive with tight stops, and after a 40% rally from the lows to have reduced long exposure hedged with some short exposure makes sense for the time being.

Click here or on the image below for a large chart.


Source: Kevin Lane, Fusion IQ, May 11, 2009.

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