We Ought to Be Seeing Some Profit-Taking

The markets saw some stalling last week with a lack of momentum to the upside. While market sentiment remains quite bullish on the NYSE, there have been some red flags surfacing on the NASDAQ, which could pressure technology stocks in the near term.

On the NASDAQ, the recent break above 2,500 was positive, but it was not sustainable as selling surfaced while market breadth and sentiment weakened. At this time, we get a sense that the markets may be topping in the near term, as investors decide whether to extend the bull market rally that began in July 2006 without any serious interruption. The problem with this is that we like to see some profit-taking in a rising market, and, so far, this really hasn’t happened. Be warned.

On the NASDAQ, breadth is mixed with the advance-decline line (A/D) split evenly over the last 10 sessions at above and below 1.0. The chart shows a downtrend.

The NASDAQ is above its 20-day MA of 2,443 and above its 50- day and 100-day MA of 2,430 and 2,346, respectively. The index broke out from its recent channel around 2,470 to above 2,500, but watch if it can hold. Upper targets include the 52-week high of 2,508 and the 14-day 70% RSI at 2,538.

On the blue-chip side, the index recently broke to another record high. The Relative Strength is relatively strong. The index is holding above its 20-day MA of 12,466. Upper targets include the 52-week high at 12,614 and the 14-day 70% RSI at 12,635. The index is overbought.

The S&P 500 remains above some key multi-year resistance at 1,380 to 1,390, but there is some topping on the chart. The index is trading above its 20-day MA of 1,420. The near-term target is the 14-day 70% and 80% RSI at 1,445 and 1,480, respectively. Watch the overbought condition. On the small-cap side, the near-term technical signals for the Russell 2000 — a barometer of small-cap performance and the economy — is stalling so far in 2007, as there are concerns about the state of the U.S. economy, going forward.

If you are trading this market, be careful not to chase stocks higher. Make sure you watch the downside with either put options or a stop-loss.