Well I did have those feelings until Friday when there was some sign that the market may take that breather that so many pundits have been calling for some time. I was feeling giddy at the lofty height the market had scaled – always suffered vertigo - but I was feeling guilty also. It just should not be that easy to make money. Although I know that there is a price at some time to be paid when the markets bounce ahead and overstretch valuations.

Regardless of whether you are a disbeliever of the Editor’s line over the last month that markets must pull back, it is fact that many stocks are now into retracement. The major banks are well into their retracement and look weak on both a daily and weekly chart.

Burning question is do I take profits now? I have always been an advocate for taking profits. I am sure most investors’ portfolios will have a spread of stocks that are exhibiting many differing price patterns so I don’t believe it is a matter of making a decision to sell all. It is a process of assessing each stock using trend indicators to see whether they have fallen through or are likely to fall through key levels. For short term traders this would be analysed on a daily chart and for the long term investors a weekly or even monthly chart is more appropriate.

Key question is whether a stock is in retracement or is now actually declining. Decline commences when the major trend has broken and when that happens the low becomes more of an unknown. In contrast a retracement can be more reliably measured and a more dependable assessment can be made of a likely new high. As an example BHP shows some signs of retracement whereas ANZ is in decline. I am sure you can see that from viewing your own charts. The significance is that retracement implies recovery, which “all things being equal”, will continue higher if it does pull back and thus I would expect BHP to make new highs. ANZ will however find new lows.

Profits I make on some “smaller caps” I am more inclined to take early before any risk of a melt down as quitting small caps in a rush can mean a weighty compromise on your exit price due to low liquidity.

Remember for a split second when you do sell – but with no guilt – that as you are taking profits that it is you – yes you! – that is causing this sell off – you cannot avoid being even a miniscule part of the mass psychology. And that is why the markets are so self-fulfilling.

Tom Scollon