Thursday, September 30, 2010

State of the Stock Market - 9/30/10

We saw a down day today on Wall Street, made all the more negative by how the intraday action played out.   Stocks started the day positive and gapped up, but those gains were almost immediately faded and stocks sold off the rest of the morning until lunchtime.   They did climb slowly back from 12:00 to 3:00, but faded once again in the final hour and closed in the bottom half of their intraday range.   Volume looks to be heavier, giving the indices a distribution day.

Technically, both the S&P and Nasdaq put reversal bars in today, but the S&P's is more significant because the morning gap up took the S&P above the important 1150 area.  Obviously when you look at the chart below, the breakout could not hold.   Both indices got support at their 9 day moving averages once again, which is positive. 
 S&P 500

On Twitter the past few evenings, I have pointed out that the breadth indicators I follow (from Pradeep over at Stockbee) have flashed some warning signs the past few evenings.    These warnings were flashed briefly in early March 2010 and they didn't amount to anything at that point.   However, a little later in the end of April, those warning signs flashed again and it did matter, as the market topped out soon after.   What happened then that acted as a good signal of the trend change (along with the breadth signals) was a break of the 9 day moving average.   From March 1 to April 26, the 9 day always acted as support for the market, with the Nasdaq not closing below it at any point during that run.   April 27 was the day that changed things - a heavier volume close below the 9 day that eventually led to much more selling and at that time a proof of a top being in place.

I am not saying we are topping here, but given the signals I am getting, it is something I am watching for closely.  I saw many of the big-cap leaders of this current run (AAPL, VMW, NFLX, APKT, ARUN, MELI) move lower on heavier volume today and in some cases through short-term moving averages.  Perhaps that is no big deal, but again, it's something I am watching.   At the very least, it could be signaling the market wants to pullback a bit and is getting tired.

 All Charts from Telechart, Courtesy of Worden Brothers, Inc.

Overall, I would remain cautiously bullish but put a very heavy emphasis on the "cautious" part.   If you are heavily long, you may want to tighten your stops here just in case we are slowly topping here.   Of course, this could just be a consolidation so I would wait for further confirmation before making any major moves.  For me, that confirmation would come on a heavier volume break of the 9 day moving average.   Good luck Friday.

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