Today’s Technical Analysis: Chart Congestion in Place

By Friday, May 4, 2012

Today’s Technical AnalysisWhile January was one of the best months for stocks, the moves in April did some 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. The continued lack of trading volume indicates apprehension.

Small-cap stocks have been impacted the most with a decline of 1.69% in April based on the close of Monday. The Russell 2000 has lost some steam after a strong start to the year and is hovering at its key 50-day moving average (MA) of 817, but threatening to break lower. My technical analysis shows possible near-term topping at above 800 and a subsequent decline to below its 20-day and 50-day MAs. The index is sitting precariously at the 50-day MA and failure to hold could see a drop to 750.

The Russell 2000 Chart

Chart courtesy of www.StockCharts.com

The chart resistance has been tough to break based on my technical analysis. The Dow Jones Industrial is hovering above 13,000, but is not on firm legs just above its 50-day MA of 13,042. The chart continues to show the overextension and the need for a market adjustment, which may be inevitable based on my technical analysis.

 The Dow Jones Industrial Chart

Chart courtesy of www.StockCharts.com

But what makes me nervous is the failure of the Dow Jones Transportation Index to follow the Dow Jones Industrial Average (DJIA) higher, as demonstrated on the chart, which is 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

Chart courtesy of www.StockCharts.com

As far as the broader market goes, the S&P 500 has strong support at 1,360 and closed above 1,400 last Friday. 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 have only been five 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. Market sentiment is showing some fragility in April. Watch this, as it could indicate a reversal of the market sentiment to neutral, because the chart is showing some flattening, based on my technical analysis.

As we move into May, be careful, as the six months from May to October are generally, although not always, the weakest time for stocks. My feeling is that there will continue to be excellent investing/trading opportunities, but you also need to be careful and selective.

You should also hedge against possible downside weakness. Find out how in My Favorite Strategy to Protect Your Gains From Market Risk.

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About the Author, Browse George Leong's Articles

George Leong is a senior editor at Lombardi Financial. He has been involved in analyzing the stock markets for two decades, employing both fundamental and technical analysis. His overall market timing and trading knowledge are extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi Financial’s popular financial newsletters, including Red-Hot Small-Caps, Lombardi’s Special Situations, Judgment Day Profit Letter, Pennies to Millions, and 100% Letter. He is also the editor-in-chief of a... Read Full Bio »