Watch and Wait

After another week of weakness in the U.S. major market equity indexes, Friday saw some relief as the indices were able to reverse off intraday lows and push into the positive.

The small cap index Russell 2000 has lead the decline since the mid September highs, off 12.1% as of Friday's low, with the S&P 500 -8.9% and the DJIA -8.7%. 

The Transportation average continues to lag all of these indices as it has been in downward to sideways grind since March of this year.  Many market pundits shrug off the weakness in the Transports, but I'm not one of them.

Much of trader sentiment that I'm picking up on Twitter is that we're very overdue for a bounce.  I'm also hearing that a "tradeable bottom" has been put in, or is very near.  So any strength in this holiday shortened trading week will probably reinforce that notion for the bulls. 

But what I sense is that most traders "need" a bounce to either lighten up positions where they've been averaging in, or because they feel that seasonality favors the bullish case.

In the chart of the Nasdaq Composite shown below (click to enlarge), it's clear that the downward trading after the presidential election two weeks ago has intensified, as the parallel downward channel slope increased. 

Whether that is a result of traders expressing disappointment in Obama's re-election, or that it puts increased odds for continued gridlock in Washington D.C. to deal with the pending fiscal cliff is for you to decide.

What is concerning is the nature of the selling that has occurred recently; it's not a panic type sell off.  Instead, the selling has been what has been described as "orderly". 

Many, but not all, sell offs that mark tradeable bottoms have a volatile, climactic period where prices trade down violently in a very short period of time.  Recent weakness "feels" like nothing more than a persistent offer to sell equities, but no panic.

So while a reflex rally is possible this week, I will be playing with smaller positions in what should be low trading volume after Tuesday.  If a defined uptrend emerges with a valid confirmation day, there will be plenty of opportunity to latch on to the next bull phase winners. 

Patience is the key, for now.

Buy or Sell Apple (AAPL) ?

The recent general market weakness in U.S. stock indices has been spearheaded by former market leader Apple (AAPL) since the stock topped out back in the 3rd week of September.

Prior to that, readers who follow me on Twitter saw several charts that I posted back on September 3, and then on September 11 that showed divergences in RSI.  These divergences do not always work, but they are one early warning sign that a change in trend may be soon forthcoming.

Here is the chart from September 3.  As you can see I had a box highlighted in light green that showed an area where I anticipated the stock would find support.

Click on chart to enlarge view:

The second chart posted on September 11 was an intraday chart over a span of 20 trading days which showed the same divergence in RSI.

The current chart shows that the area I highlighted in the first chart was undercut but by roughly 30 points based on today's intraday low so far today.  This relentless selling pressure, coupled with the way the stock knifed through its 200 DMA shows extreme weakness.  Sellers want out and they don't care about moving averages or zones of support; they just want liquidity.

Here's an updated current chart:

Given the severity and swiftness of the decline over the last 7 1/2 weeks, I would be a seller (if you haven't sold already) on any bounce back to the high $580s to low $590 area.  This stock has been "over-owned" and every money manager's favorite stock to buy during this bull market.

Stocks that move this far this fast can be great if you're a nimble short term trader and/or options player.  But most investors who take a longer term approach should be cautious on the long side until the stock settles down and forms a new base.