Last week the stock market had its best week of the year so far. Is this the rally that we have been looking for? Has the market finally bottomed? Here’s what to look for in the coming weeks:

First, let me say YES, I think this is the rally we have been looking for. The market has been oversold recently, and I have told many people that I was looking for a rally very soon. It is not unusual to see a violent bear market rallies. While most of the recent rallies (if you want to call them that) have been nothing more than short covering and short lived, this one is different.

This rally started after setting new lows on the Dow and S&P 500, levels that have not been seen for over a decade. The first day we saw a massive 378 point rise on the Dow. The market was up over 5% in a single day. On top of that we closed on the highs of the day with heavy volume. The following day, I was curious to see if it would hold or sell-off from profit taking. It held, and finished 3 points up. What is the big deal with a three point move right? Well, there it is not about the points, but the fact that the market held up after a 5% move the day before. On top of that we finished the week with another triple-digit day; three straight up days.

Before you get too excited, I don’t think this is the beginning of a new bull market. In fact I think it is a fantastic opportunity to sell some stuff and raise some cash. I think we should still have some upside, and the charts indicate that we could get back to 8000 on the Dow. That is what I’m looking for from this rally. 8000 is my target, and then it is time to sell some stuff or at the very least buy put options to insure your stocks from another drop.

Could I be wrong? Absolutely, but I don’t see the economy recovering this soon. We are in the first quarter of 2009 and I don’t see the economy starting to recover until Q4 at the earliest. So, here is the game plan I am recommending:

I have clients who have wanted to cash out of some mutual funds and out it into real estate (which I think is a fantastic idea), who I have been telling to wait for the rally and then sell. If you have wanted to sell and raise some cash to move into other asset classes, or just if you bought stocks just before the rally, this is your opportunity to sell. If you recently bought any financial stocks (several have doubled this week), then you need to take some profits. If you think this rally has more to it and that the market is not done going up, then PLEASE hedge yourself against another massive drop. There are a few ways you can do this. You can buy put options to insure your stocks. This will lock in a price at which you can sell your stock even if it crashes. You could buy the SDS (double short S&P) or the DOG (short the Dow). In fact I would use a call spread on the SDS or DOG. Another thing you could do is buy GLD (gold ETF). Exposure to gold should hedge against a falling market and/or inflation created b the massive government spending on bailouts and stimulus plans, etc…

I believe this rally will be a good one and that it will bring us back to 8000 on the Dow, but don’t be foolish, there is no reason to think the market is fixed just yet. Use necessary measures to protect your portfolio from slipping back to where it was a week ago, and if you have wanted to move something, this is your opportunity. When we get back near 8000, start getting defensive again.

For more information on how to use options to protect your portfolio and profit in any market check out my audio program Winning With Options. Also be sure to check StockWatch for the latest market updates. If you haven’t already signed up you are eligible for a 60 day FREE trial.