If you’re a trend follower, I bet you were leaning bullish heading into this week. And why shouldn’t you have been? The S&P 500 was in the midst of a two-month uptrend complete with rising 10-day and 20-day moving averages. Even the 50-day was starting to lift.

Unfortunately, bullish portfolios got whacked this week due to the market pullback. If Friday’s down-gap holds the S&P 500 will have fallen for five straight days.

So here’s the question. How should we manage bullish portfolios during a retreat like this?

Choices, Choices, Choices

This question was posed to me by one of my mentor students on Thursday. He had a slate of covered calls, bull puts, and the like, and saw a drawdown in his portfolio this week. So, naturally, he wondered if he did anything wrong or if he should have done something different.

I told him trend traders have three choices when dealing with pullbacks.

First, do nothing. Assume the dip gets bought like all its predecessors. As long as you’re sized properly, the drop shouldn’t cause a substantial drawdown. If it does, that simply means you carried too much exposure into the week.

To be clear, this first approach means you trade with the trend and don’t worry about trying to flip bearish on every little down tick. You rely on your small size to help you through the occasional pullbacks without panicking along the way.

But what if this week’s pullback morphs into a correction that kills the two-month uptrend?

Then, you lose. Pure and simple. There isn’t anything but luck that prevents a trend follower from losing money when the trend finally reverses.

Second, with the S&P 500 running headlong into overhead resistance (2800), you could have reduced exposure. The pro is that if the market pulls back (it did), you wouldn’t have lost as much. The con is that if the market powered through the ceiling, you wouldn’t have made as much.

There are a variety of ways you could cut the delta of a long portfolio. Close some of your bullish trades. Hedge or adjust them to reduce the delta. Or, enter new bear trades on other stocks to offset existing bullish positions.

Obviously, traders who lightened up in anticipation of the ceiling smacking down prices are feeling smug right now.

Third, and most insane, you could have bailed on all your bullish positions (reasoning the market was at resistance) and entered bearish trades on Monday to play the downside. This, I submit to you, is ridiculous. How many traders are nimble enough and possess sufficient forecasting prowess to ride the market higher and then deftly bail at THE top and ride the market lower on a downswing. And not just once, mind you – but consistently?

Very few, I’m afraid.

So that’s it. You have three choices, and one of them is dumb.