Cautionary Stance Building...

The lack of a sustained rally over the past week of trading has forced my defensive awareness to be on the rise given my overall long bias going forward. There is no need to be fearful yet, but if you are currently long like I am, you must consider what to do if the market continues lower to begin this week. There is still support from the 6/16 low and from the lows of March that will provide some potential areas for longs to step in and buy. However, any move below 1255 will trigger some hedge plays for me (i.e. you could consider buying the US dollar or US treasuries to hedge any long positions). Another approach would be to exit some long positions if the underlying support breaks down. This would be insurance against a precipitous fall. If the selling turns out to be short lived, and the market rebounds after a pierce below the 6/16 and/or the March lows, then you can always get back into your long positions. Whatever your strategy, you have to plan for a potential further decline.

I continue to expect that a rally is coming, but the odds have been reduced a bit now after the previous two rally attempts have been rejected. The odds that the market will now make a lower low have likewise increased.

Its a tricky situation and one must exude caution. History shows that large run-ups in the prices of energy and food are followed by major slow downs in the economy which also means lower stock and commodity prices. I suspect that the current correction is only a precursor to the bigger correction which will be down the road. While I do expect another run higher before this happens, I have to now be ready for the alternative, a continuation down.

Lets see how the week begins...