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Stock Market Commentary & Forecasts, Financial & Economic Analysis

Welcome to Profit Confidential • Monday, May 21, 2012

Stock Market Charts Looking Dangerous

Wednesday, October 5th, 2011
By George Leong, B.Comm. for Profit Confidential

The climate for the stock market is dangerous at this juncture, with all signs pointing to additional downside moves on the charts. Technology and small-caps are especially weak. The climate for the stock market is dangerous at this juncture, with all signs pointing to additional downside moves on the charts. Technology and small-caps are especially weak.

The third quarter turned out to be the worst since the financial crisis began in 2008. The key stock indices, including the DOW, S&P 500, and NASDAQ, lost over 10% in the quarter.

Now get set for October—historically a month of uncertainty, it but has shown decent results in the recent years. October was the best month for the DOW, S&P 500, and NASDAQ from 1993 to 2007, according to the Stock Trader’s Almanac. The plus is that October preceded the best six-month period for stocks from November to April. The period from May to September was negative, with October to come.

The bears continue to be in control, as the broader market approaches bear market territory. Small-caps are already in a bear market, down nearly 30% as of October 3.

Worse was the downside break of the S&P 500 below 1,120, 1,114, and 1,100 on Monday. The break is concerning and could worsen if support does not surface.

The tech-laden NASDAQ lost over three percent, while the small-cap Russell 2000 plummeted over four percent playing on the fear of another potential recession. The weakness in tech is a red flag, as tech has been a market leader.

The underlying market strength and sentiment are extremely weak. The stock markets are trending lower.

As of October 3, only 6.09% of all U.S.-listed stocks were above their 20-day moving average (MA), well down from 41.95% a month earlier. About 10.36% of U.S. stocks were above their respective 200-day MA compared to 21.55% a month ago. These are not good metrics and indicate a stock market in trouble and trending lower.

Breadth is extremely weak and trending lower. On Monday, the NYSE reported 48 advancing stocks and 1,900 declining stocks.

Investor sentiment is bearish. On the NYSE, there were a mere six new highs and a whopping 544 new lows on Monday. In fact, there have not been over 20 new highs in each of the last nine sessions on the NYSE. There has only been seven bullish sessions on the NYSE since July 26. Technology is even worse. On the NASDAQ, there were only four new highs and 389 new lows on Monday, with only one bullish session since July 26.

The near-term technical view remains bearish, as the key indices trade well below their respective 50-day and 20-day MAs on relatively weak Relative Strength.

The NASDAQ, S&P 500, and Russell 2000 continue to display a bearish death cross on their respective charts, an indication of potential additional losses.

The fact that we have yet to see a firm bottom makes the situation dangerous.

I continue to sense that gains will not be sustainable, as traders appear to be lacking any solid confidence to bid stocks higher.

Be very careful, as stocks may move lower before rallying.

The best strategy for risk-averse traders is to protect via put options.

Be careful and remember that maintaining your capital will allow you to trade longer-term.

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Profit Confidential AuthorGeorge is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.

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