We are beginning to see some more serious issues in the major indexes, especially the NASDAQ, from a technical perspective. That said some yellow flags are beginning to emerge in other areas as well. The weakness in Apple of course is creating a major effect on the NASDAQ more than the S&P 500, so keep that in mind. But there are issues – beginning with yesterday being a "distribution day"; the fourth in a few weeks. Generally this is going to be an indication of institutional selling.
With the NASDAQ we have what appears to be a bearish head and shoulders pattern. Last Friday's session was important as it seemed to be the first step to a path to negate such a pattern but it turned out to be a headfake. If the pattern fulfills the measured move to the downside would take the index to about NASDAQ 3000.
As for the S&P 500 we don't have the exact same pattern but we do see the first lower high since the June lows. While June and July were extremely volatile and almost all the higher highs came on overnight gap ups off central banker comments or European headlines, the pattern did play out. August was a quiet month where volatility disappeared and then September was again driven by easing actions by the Fed and ECB – but Sep 15th (the day after QEinfinity was announced) was the peak of the cycle and the high in the index. The last push up failed to create a new high.
That said this index is still in the major ascending channel it has been traveling since June. But on a shorter time frame there was a wedge (triangle) shown in light blue that it broke out to the upside of late last week… and immediately failed.
This wedge breakout failure also happened in the Russell 2000.
Outside of the index issues this reversal the past few days led to a lot of breakout failures in individual names, especially the leadership names. And in the end this is a market of stocks rather than "the stock market". So we definitely have a change in character over the past few days that must be noted.
As we are in earnings season (note another warning from Cummins Engine last nite) the action should be more "gappy" in the next few weeks as the entire market is taken up or down based on a bellweather report here or there – it's silly but that's the way it is. And this selloff yesterday showed the worst breadth in the market since July….
….so in the very near term the market is quickly headed to a more oversold condition from which dead cat bounces can occur.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog