Chart Resistance Tough to Crack;
My Technical Analysis

technical analysisWhile January was one of the best months for stocks, the upward advance has been stalling, which shouldn’t be a surprise given the rapid move and the reality that the rate of gains cannot be maintained without periodic market adjustments. My technical analysis is that stocks in an uptrend go through periods of ups and downs, which is normal and healthy as long as the subsequent highs and lows are higher on each upward wave. You also need buying conviction on the buy side, which helps to provide the underlying strength.

Small-cap stocks have been impacted the most in the recent weeks, as the Russell 2000 has lost some steam after a strong start to the year and broke below its key 50-day moving average (MA) of 791 on Tuesday, before a slight bounce back above it. My technical analysis shows near-term topping above 800 and a subsequent decline to below its 20-day and 50-day MAs. The index is precariously sitting at the 50-day MA, and failing to hold could see a drop to 750.

small-cap stocks

Chart courtesy of

The chart resistance has been tough to break based on my technical analysis. The Dow Jones Industrial Average (DJIA) failed to hold at 13,000 after several breaks, and is below its 20-day MA, but holding above its 50-day MA. The chart shows the overextension and the need for a market adjustment, which we may be seeing based on my technical analysis.

Dow Jones Industrial Average

Chart courtesy of

But what makes me nervous is the failure of the Dow Jones Transportation Index to follow the DJIA higher, as demonstrated on the chart; it’s a bearish signal based on Dow Theory. The Transport index has breached both its 20-day and 50-day MA, which is near-term bearish according to technical analysis.

 Dow Jones Transportation Index

Chart courtesy of

As far as the broader market, the S&P 500 broke below its key 1,360 point level on Tuesday and my technical analysis estimates that it will not be easy to surge higher in the near term. The index has been in a sideways channel since October 2011.

The bearish divergence between price and volume on up days indicates uneasiness.

Take a look at the volume of the NASDAQ. Since the start of the year, there has only been four sessions with over two million shares traded, so this doesn’t reflect on strong confidence in the rally. My technical analysis shows that the lack of strong trading volume is indicating a red flag and the absence of any underlying strength and mass market participation in the rally.

The market breadth, representing the advancing and declining stocks on the NASDAQ, has also been on a downtrend as shown on the chart.

S&P 500

Chart courtesy of

While the market sentiment continues to be bullish, with the new-high/new-low ratio displaying a bullish reading in 31 straight sessions dating back to January 17, the recent readings have been weakening, with three straight neutral readings on the NASDAQ. Watch this, as it could indicate a reversal of the market sentiment to neutral, because the chart is showing some flattening based on technical analysis.

market sentiment

 Chart courtesy of

I continue to suggest taking some profits off the table. Use put option as hedge protection and write short-term covered call options to generate some premium income should markets stall.

In other news, Apple Inc. (NASDAQ/AAPL) just showed off the new “iPad 3” for the world to see and, while it’s better than the previous models, it’s not an earth-shattering change. However, people will still flock to the stores to buy it. Apple is the top stock, while rivals such as Research In Motion Ltd. (NASDAQ/RIMM) are choking in the dust, as I discussed in When the CrackBerry’s No Longer Addictive.