Tuesday, November 11, 2014

Frothy Market Action Masks Major Warning Signs

The Nasdaq and the SP 500 have staged another impressive rally, just as they seemed to be on the verge of an overdue, prolonged, major correction. They are up over 10% in the last four weeks, distribution is low, bad news is ignored, good news is cheered, and volume, in general, has been above average. But, the underlying technicals have been deteriorating. 

The Nasdaq Advance Decline line is still in a major downtrend downtrend even as the Nasdaq continue to make new fifty two week highs, and volume has been drying up over the last few days as the market makes new and all time highs, a major sign of declining participation.

The NYSE, small/mid cap, European, and all of the Asian indices, except for China, have not been able to rally near new highs, and the Russian Stock Market is teetering on the verge of collapse. Stalling in an area where distribution would be expected to set up the next major leg down.

The VIX contracted quickly, but still maintains its uptrend since July, showing complacency sets in too quickly and nervousness is increasing with each additional rally attempt.

Value is outperforming growth, which initially led the market off the bottom, and long term interest rates are stalling at their respective fifty day moving averages and appear ready to roll over again, indicating a flight to safety. Interestingly, Gold (GLD) and Silver (SLV) are in free fall.

Leading growth stocks(click to review) have behaved extremely well since the market bottomed on October 15th. Breakouts have occurred almost daily, in heavy volume, and follow through strongly, in above average volume. But once again, just focusing on the surface is deceiving. 

While a strong follow through after a breakout is exciting, a strong follow through out of a late stage base could be a sign of climactic action, and nearly all of the early breakouts that followed through strongly, are out of late stage, wide and loose bases. 

More recently, a strong majority of the early breakouts have failed to follow through any further along with the market and volume has been deteriorating as just a handful of stocks continue to make further progress. Intraday volatility is extremely high, making handling positions much more difficult. An indication of potential exhaustion and waning participation.

Recent breakouts have failed quickly or failed to follow through, and have continued to come out of late stage, wide and loose, v-shaped bases, with lagging relative strength. To make matter's worse, a few bull market leaders imploded on earning's reports, Netflix (NFLX) and Salix Pharmaceuticals (SLXP). Biotech stocks, Gilead Sciences (GILD), Pacira Pharmaceuticals (PCRX), and Biogen (BIIB), one of the strongest groups in the market, have been stalling or breaking down. Even Apple (AAPL) has run out steam.

Short trading ideas(click to review) are almost completed with their setups. A majority could use the rest of this week and maybe next to tighten up before breaking down. Few sets up have fallen apart despite an impressive 10% run by the market, as institutions take advantage of market strength to distribute the weakest and strongest stocks in the market. Aggressive traders could consider a short or two, but patience may pay off in most other short setups.

Oil and gas stocks continue to act sloppy and drag down all related groups including the Solars. First Solar (FSLR) is breaking down and Sun Power (SPWR) is on the verge of joining. Gilead Sciences (GILD), Biogen (BIIB), and Facebook (FB), on the leading growth stocks analysis(click to review) list, appear to be setting up late stage base failure entries. Review the updated short trading ideas (click to review) list for more potential entries over the next few weeks. 

If most of this sounds familiar, it is. Almost every rally since 2013 has played out this way. Indices act strong while leading growth stocks drift lower, not appearing to suffer any damage with a few acting strongly, the "distractor" stocks, creating a mirage that everything is okay, when it is not. Within a few weeks the market rolls over into another pullback or correction, wiping out recent gains in a matter of days, if not hours, but before that, traders get ground up as the market tops.

It is a bad sign when leading growth stocks are consolidating, even tightly, while the market is essentially screaming higher. It is a sign of distribution, weakness, not accumulation, strength. This type of action leads to a market that rolls over and punishes traders that over stayed their welcome  and/or increased leverage, in fear of missing a big move.

Traders should clearly be out of any losing or lagging position, and extremely tight on stocks exhibiting climactic action. There are few breakouts in this rally that are out of first or second stage bases. 

There is little reason to give back hard earned profits in over extended positions, give back gains in lagging positions, and/or suffer greater losses in losing positions.
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