Hold That Line

The leading U.S. equity market index Nasdaq Composite underwent another day of selling pressure as disappointing earnings from Google (GOOG) (inadvertently released prior to the market close) weighed on the tech heavy index. 

As the chart below shows, despite recent weakness, the Nasdaq has remained above the recent uptrend line drawn from the recent June 5 lows.  So while that is encouraging for the bulls, we've now had 7 of the last 20 trading days end in distribution days (professional selling). 

The Nasdaq index dropped below the 50 DMA last week, then regained it on Tuesday and Wednesday of this week, only to fall below it once again today.  This is another tool that many active professional traders use to monitor the strength of the market.

Also, the index has formed 2 small bear flags of late, and has traced out what could be an intermediate term head and shoulders top.  3037-3040 is a key area of short term support.

The DJIA and S&P 500 are still above their 50 DMAs as they are not reflecting the weakness in the Nasdaq.  So for now, the uptrend is intact as long as the indices can hold their recent respective uptrend lines.


Click on chart to enlarge:

Simple Profit Taking or Something More?

Recent action in the U.S. stock market has led many traders to question whether the market is in the process of forming an intermediate term top.  We've had 5 distribution (professional selling) days in the previous 20 trading days in the S&P 500 index (SPX).

Some market leading stocks like HAIN, AAPL, DDD, SSYS, AMZN, etc. have sold off and displayed relative weakness.  The market has been propped up with the guarantee of "free money" from Fed ever since they announced the latest round of QE, even going so far as to leave it open ended.

So why the market weakness?  What can the Fed do other than promise QE infinity as it has already done?  What is the market discounting that we don't know yet?  Or is this just a temporary period of weakness where money managers who are up on the year take profits before they close their books for the year?

A lot of questions there, and unfortunately I don't have any quick and definitive answers.  I do find the chart pattern between the initial leg of the 2007 top (left side of the big head & shoulders top) to possibly serve as an eerie comparison to the current market.

The biggest difference that I see right off the top is the 2007 top had a few more distribution days prior to the "false breakout".   That said, we could bounce back inside the recent trading range and generate a few more professional liquidation days before the real top is in place. 

This is why you must monitor the market and your portfolio holdings on a daily basis.

Here's the left side top of the 2007 top. (Click on chart to enlarge)

And here's the chart of the current market: