Skip to main content

Down week for stocks - little blip or start of something bigger?

Should investors be worried?

Stocks actually closed with losses this week. This is something we haven't seen much of lately so every time it happens, I begin to think maybe this is finally the long awaited pullback.

Certainly, price action in the stock market was not particularly reassuring. Despite a sequence of better than expected earnings from most companies and some spectacular earnings from the likes of Apple (AAPL) and Amazon.com (AMZN), stocks were unable to shake off the blahs. The three major averages lost a fraction of a percent, most of it on Friday. Small-caps got spanked as the Russell 2000 lost a big 2.5%

Economic reports presented a so-so picture of the U.S. struggling to rebound. Initial jobless claims were the big disappointment, rising again after economists predicted a decrease. Coupled with an upward revision of the previous week's numbers, it confirmed that the job market could be much worse than merely a lagging indicator. Real estate also showed that it didn't know which way was up as Existing Home Sales came in higher than expected while Housing Starts and Building Permits were lower.

Let's review some charts and see if the worry is justified.

The view from Alert HQ --

Charts of some of the statistics we track at Alert HQ are presented below:


This first chart tracks our moving average analysis. The count of stocks above their 50-DMA (the yellow line) is decreasing. The line has also again failed to cross above the magenta line which tracks the number of stocks whose 20-DMA is above their 50-DMA. This is a bearish setup that is developing. The only hopeful indication is that the number of stocks tracked by both of these lines are still at reasonably high levels.

The next chart provides our trending analysis. It looks at the number of stocks in strong up-trends or down-trends based on Aroon analysis.


Here we see that barely 30% of stocks can be considered to be in strong up-trends. This is not the kind of level we have previously seen at market tops or at market bottoms. According to this indicator, we are stuck in no man's land. As the number of stocks in strong down-trends is starting to show a bit of an uptick and the number of stocks in up-trends drops, it suggests that the underpinnings of this rally are weakening.

Looking at the S&P 500 as a proxy for the market, things actually don't look too bad. Up-trend is intact and Aroon indicates it's a reasonably strong trend. All the moving averages are moving up in concert and the index hasn't even broken below the 20-DMA. This implies the major trend remains solidly positive though a short-term downswing could easily be in the offing.


Indeed, stocks seem to be topping out on a short-term basis. MACD is providing a glimmer of confirmation. The overall trend of MACD has been going down while stock prices have been going up. This is a divergence that many investors believe presages a turn in the trend. The faster moving average (black line) has just fallen below the slower moving average (red line). This is a classic short-term bearish setup.

Conclusion --

I've used the phrases "short-term" and "primary trend" several times in this post and for good reason. Investors need to separate the two and understand how their trading strategy plays into this dichotomy. The evidence today seems to be pointing to a short-term pullback, beginning about now. On the other hand, it is hard to think that such a pullback would be a threat to the primary long-term trend which thus far is solidly up.

Consider the outcome of a pullback that more or less looks like the last three pullbacks. This would result in the S&P 500 dropping to the range between 1030 and 1040. This implies a drop of another 4% of so from here. This would confirm the 50-DMA as support, leave the primary up-trend intact and suggest that this pullback should be looked at as a buying opportunity.

So am I worried? Maybe a little bit but so far stocks just seem to be following the usual ebb and flow.

Comments

Anonymous said…
Dear Author blog.trade-radar.com !
I join. And I have faced it. Let's discuss this question. Here or in PM.

Popular posts from this blog

Running TradeRadar on Windows 7 and Windows 8

Development of the original TradeRadar Stock Inspector software was begun back in the days before Windows 7 and Windows 8 were available.

As these newer versions of Windows have become more popular, we have heard from some users that they are having problems installing and running TradeRadar on their newer PCs.

The good news is that TradeRadar will work just fine on Windows 7 and Windows 8. All you have to do is adjust the Windows Compatibility Settings to ensure TradeRadar runs as intended.

It is recommended that you can apply Compatibility Settings when running the initial installation; however, it is also possible to apply Compatibility Settings after the program has been installed.

Prior to installation
After downloading the install program, go to the folder where you have stored the TradeRadarStkInsp_7_Setup.exe or TradeRadarStkInsp_7_PRO_Setup.exe executable. Right-click on the executable file and select Properties. Click the Compatibility tab. Adjust the Compatibility mode to …

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position.

This first post in the series starts at the beginning: getting good investment ideas.

Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets.

As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street professionals and …

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas.

Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what to lo…