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May 21, 2008

Rally Failures

Okay, here's another take on the current setup in the equities markets. The SPX and NDX are both sporting bearish candles on Monday's action with downside confirmation on Tuesday. The whole world sees this. When everyone sees it, one has to wonder if the play is too easy. In early April, the indexes saw a similar setup, and the downside action lasted all of 6 days then erased all the gains with two gaps higher. However, I do believe equities will suffer a little more this time around. They may not collapse, but I think the correction/consolidation will last longer than 6 days. Here's what I'm looking at:

First, both the SPX and NDX are stretched considerably above their 65 DMAs, a cycle I have found to be reliable for both this indexes.

stock chart

Second, banking shares look like they are rolling over again. Where banking shares go, so goes the market.

stock chart

So, we're looking at the two biggest sector components of the S&P 500, tech and banking, both ready to take a dive. Maybe energy will surge enough to keep things afloat, but I wouldn't count on it. Here are some other indicators that psychology has become too bullish:

market indicator

market indicator

stock chart

Seems to me all the evidence points to at least a medium-sized pullback here. I anticipate the SPX and NDX will at least visit their 65DMAs before any new rally highs are chalked up.

 

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