Wednesday, December 03, 2014

Stalling Heavy Distribution Low Volume Confirming Other Major Red Flags

While the indices seem to be on a relentless march higher, the underlying technical picture has been deteriorating over the last three weeks. The SP 600, which has led the market lower on several occasions this year, failed to make new highs along with the other major indices and has suffered five distribution type days over the last thirteen days. The DOW and SP 500 have suffered three distribution type days over the last five days. The Nasdaq, the leading index, has suffered four distribution type days over the last four weeks.While these counts may not sound high, volume has been drying up significantly on recovery days, and picking up strongly on stalling and heavy selling days.

Leading growth stocks have acted awful over the last three to four weeks. The majority of the early leaders off the October 15th bottom have stalled and are starting to fail. Most broke out of late stage, wide and loose bases, which are more prone to failure, and staged what appear to be climactic runs. Recent breakout attempts are out of late stage, v-shaped bases with no volume confirmation and fail to follow through for more then a few days before rolling back into their bases.

Semiconductor stocks, NXP Seminconductors (NXPI) and Avago Technologies (AVGO), broke out of late stage, v-shaped bases, in volume well below average. Chinese stocks, and bull market leaders, Vipshop Holdings (VIPS) and Bitauto (BITA), are failing out of late stage, wide and loose bases. Facebook (FB) and Gilead Sciences (GILD) have failed out of last stage bases. Even Apple (AAPL), the clear leader off the October 15th bottom, has seen volume diminish into new highs with heavy selling creeping in.

Short trading ideas on the other hand have been able to follow through to the downside but not without significant shakeouts first. The majority have been difficult to handle and most likely stopped traders out before following through to the downside. Many are now using the indecisive market action to once again tighten up into moving averages for another breakdown attempt over the next few days and weeks. Almost none have fallen apart. A strong sign of a looming correction.

Commodity related stocks, Diamondback Energy (FANG), Gulfport Energy (GPOR), Chicago Bridge and Iron (CBI), Newmont Mining (NEM), and SolarCity (SCTY), have been the weakest with many commodities approaching and breaking multi year lows. Even tech related stocks Priceline (PCLN) and 3D Systems (DDD) are forming or following through on bearish head and shoulder patterns.

With almost no solid, low risk, long or short setups, the last few weeks have been a good time for traders to be minimally invested or even in cash. Aggressive traders should only be holding long stocks marching straight up with very tight stops or a few short positions that have slowly rolled over without a shakeout. 

The topping practice can take a few weeks as we've seen in past rollovers this year, rewarding patient traders and chopping to death overly active traders. Avoid the long side at all costs and continue to monitor short trading ideas for new setups.
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