Rally Facing Resistance, But Don’t Sell All Just Yet

market gainsWatching the charts on Monday, I noticed that the major stock indices broke below the intraday upward trend line at around 2 PM and reversed to the downside in a two-hour slide.

My feeling is that the failure to hold onto the rally that appeared to be in place was indicative of the lost momentum towards stocks, as reflected by the lower new highs on both the NASDAQ and NYSE.

My fear is that a failure to rebound back to the recent highs could drive stocks lower to chart support levels.

The rally is facing resistance and showing some fragility on the charts, but I cannot say an end to the rally is likely. Don’t go out and start selling your holdings. Yes, take some profits off the table as prudent money management, especially on some of the bigger winners.

The recent losses have not been significant. The DOW has corrected 2.64% from its recent two-year high, while the Russell 2000 is down 3.49% and the NASDAQ down 3.05%. These are minor adjustments, so there could be additional downside moves ahead of us.

A red flag in my view is the decline in investor sentiment as reflected by the new-high/new-low ratio. The new highs on the NYSE came in at 77 on Monday, after 68 new highs on Friday. The readings are weak compared to the six-day moving average of 394 new highs, including 679 and 603 on November 4 and 5. This is worrisome, as a loss in momentum can drive down stocks. In bull markets, the number of new highs tends to rise. Watch to see if the number of new highs continues to decline, since it warns of declining momentum.

The near-term technical picture is showing some fragility with the Relative Strength at below neutral, which indicates some further weakness in the near term.

According to Trimtabs Investment Research, selling by insiders has been surging—a possible indication that the market is too rich and could be headed for more losses.

Be careful, as the S&P 500 VIX is trading around 18, a sign of a relaxation amongst traders.

I must admit that the rally and sustainable gains without a correction of five percent or more have been a surprise.

I’m a firm believer in adopting strong risk management to protect your investments and hard-earned capital. While the stock markets are in a bull phase, you still need to be careful.

I strongly advise you to continue to take some profits and use Put Options as a defensive hedge