Interactive Investor

Chart support point identified

1st February 2016 11:02

Lance Roberts from ii contributor

As I laid out last week, the markets were oversold enough on a short-term basis to have a fairly healthy reflexive rally. With the internals of the market still weak, along with the economic and fundamental backdrop still deteriorating, there is little reason to believe the market has completed its corrective process.

As shown in the chart below, the levels identified last week remain good targets for taking some risk management actions in your portfolio:

1,970-ish - Sell laggards and losers in portfolios. Take profits in winners and raise some cash as a hedge against further volatility. I would do the bulk of your risk management in this zone as I don't currently expect the market to be able to achieve the next two levels.

2,000-ish - Continue rebalancing portfolios to reduce risk. Take profits and sell losers.

2,030-ish - Be at final risk-adjusted allocations.

Notice that the market has now traced out a fairly definitive "head and shoulder" technical pattern similar to that seen in 2008. If this rally fails, and breaks neckline support at recent lows, the market will be in a confirmed bear market.

The Monday morning call

As stated above, the markets are finally providing the bounce that we have been waiting for patiently over the last three weeks. I admit I was getting awfully worried that we might not get one, but this is why patience and an adherence to a disciplined strategy generally pays off longer term. It will not always work exactly as intended but, more often than not, it will.

As identified above, the initial target to begin reducing portfolio risk and rebalancing portfolios will be in the area of 1,970 on the S&P 500. Importantly, note the word "area". One of the mistakes individuals consistently make is picking a specific price point to take action. The problem is, so are many others. I have seen investors repeatedly fail to take action, ultimately to their disappointment, because a precise number didn't get hit.

Don't get tripped up waiting for 1,970 precisely to take action. If the market fails and turns lower, you will have wished you had done something as the next opportunity may be at lower levels.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of "The Lance Roberts Show" and Chief Editor of the "Real Investment Advice" website and author of The "Real Investment Daily" blog and the "Real Investment Report". Follow Lance on Facebook, Twitter and Linked-In