Investor Alert: S&P 500 Chart Shows Potential Decline

Thursday, April 14th, 2011
By George Leong, B.Comm. for Profit Confidential

There's some danger on the S&P 500 chart. The index recently failed to break higher at the previous high point of 1,344 and now it looks like, unless we see a quick upward move, the index could be heading lower towards a lower pivot point at 1,249, down five percent from the current level. What does this mean for you?

My stock market advice to you at this time is to be careful. Stock picking is about trading the right direction, but also making sure you have a defensive strategy in place should the trade turn against you.

The sentiment in the market remains bullish, as stocks continue on a nice two-year rally from the March 2009 low. The trend of the NYSE new-high/new-low (NHNL) has been edging higher, with 180 of the last 190 sessions bullish as of April 11. In the technology area, 136 of the last 148 sessions have been bullish. Yet, both the NASDAQ and NYSE turned neutral on April 12.

I see some danger on the S&P 500 chart. The index recently failed to break higher at the previous high point of 1,344 and now it looks like, unless we see a quick upward move, the index could be heading lower towards a lower pivot point at 1,249, down five percent from the current level.

The S&P 500 chart shows a bearish double top, with the index precariously wavering around the key 50-day moving average (MA) at around 1,314. The moving average convergence/divergence (MACD) indicator, something that I like to look at, also appears set to flash a sell signal. Think about it this way: the previous time the MACD turned bearish, the index corrected from 1,344 to 1,249. So be very careful now and perhaps wait to buy on a possible correction.

I’m also seeing some fragility on the NASDAQ chart, with two failed upside attempts with potential upcoming reversal on negative near-term technical signals.

My stock analysis is also partly based on the light trading volume during the upward streak. Failure to see high volume indicates an absence of mass market participation.

At the back of my mind, I feel nervous that we have really yet to have encountered a correction of any significant degree, albeit there have been several down days of over one percent in the recent weeks. This is not to say that stocks are overvalued; I feel they are fairly valued based on the current economic and earnings metrics.

Unless there are fresh data that support additional gains, stocks could trade sideways or break lower. The market will continue to need leadership to have any chance of advancing higher. The banking sector is looking more positive and could drive the buying, as there is some confidence surfacing towards America’s financial structure.

With the two-year bull market, investors and traders are looking for a reason to sell and take some profits. At the same time, there is also a feeling of not wanting to miss out on more potential upside opportunities. Option traders could use call options to play potential gains, while taking some profits on current stock positions. In this way, you can manage the risk.

The key is to enter into smaller positions, so that, if the market slides, the loss would not be as critical to your trading base.

If the tide turns, make sure you are not tied emotionally to the stock. Sell it.

I believe in adopting strong risk management to protect your investments and hard-earned capital. Use Put Options to hedge against a downside move.

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Tags: bull market, stock analysis, Stock Market Advice, stock-picking

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George 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.