Stock Market Charts—George’s Analysis this Week

George's take on what the charts are saying about the stock market right now.A month ago, I expressed my concerns with the S&P chart and thought stocks were set for additional weakness. My investment advice was to be careful and not to chase stocks. Even after the one-day surge last Tuesday, I thought it was largely due to an extreme oversold condition resulting from stocks closing lower in seven of eight sessions. In my view, the bias continues to be negative and, until there is a base formation, I sense that stocks may edge lower.

Unless stocks rallied to end the week on Friday, we could be set for the seventh consecutive week of losses. The key indices have corrected between seven percent and 10% from their 2011 highs. The NASDAQ and Russell 2000 have retrenched back to the red this year. The S&P 500 is up a mere 0.64% as of last Wednesday and it will likely falter back to the red.

I continue to see some exhaustion on the charts and additional downside moves, especially if the S&P 500 fails to rebound back to its April low of 1,294 and breaks below its 200-day moving average (MA) of 1,252.

Technically, the picture looks bearish in the near term on weak Relative Strength. Watch for any buying support due to an oversold technical condition. We need to see a base of support buying form; otherwise, stocks could continue to edge lower towards the 200-day MA.

The technical strength is weak. For instance, market breadth on the New York Stock Exchange showed a mere 160 stocks advancing on Wednesday, representing the lowest level since 118 advancing stocks on June 1, 2010. This may point to a breakdown on the chart.

Investor sentiment on the NYSE and NASDAQ was bearish on Wednesday. I’m clearly seeing some fragility. The sentiment on the NYSE has been bearish in three of the last four sessions to June 15. Prior to this, there was only one bearish reading (June 6), which occurred over a year earlier on June 7, 2010.

Moreover, the trading volume on the NASDAQ traded well above its short-term and longer-term MAs on Wednesday on a major down day. This is bearish, as it helps to confirm a mass market bias towards selling.

And, while there may be a desire to buy, be careful and wait until we see if there is firm buying support before you jump in.

This is a dangerous market that can move lower. Be careful and only do select buying. Use put options as a defensive hedge.

Adapt a defensive approach at this juncture and wait for some sort of support before buying. Be careful with growth and tech stocks. The upside may be limited at this juncture and stocks could drift lower or trade sideways through the summer months.