The Drill Tells Me to Be More Cautious

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I have attempted to be very clear this year. My weekly piece has focused on the overall technical shape of the market and the state of the Leading Economic Indicators (LEI’s). When the weekly read of these factors are improving you need to be bullish and when they are weakening you need to become more cautious.

These readings are now weakening and therefore I am now more cautious on the market then I have been for several months. First let’s look at the technical condition of the market. On a short term basis things have weakened. 73% of stocks in the S&P 500 are either basing or advancing. 69% of stocks in the secondary markets are in good shape technically. Also, there have been several negative divergences in the indexes over the past few weeks of trading. A divergence occurs when some but not all of the major indexes fail to take out resistance (negative divergence) or when some but not all of the indexes go below support (positive divergence). These divergences have been coming fast and furious over the past few weeks. This has led to greater volatility and a pullback in the market.

The near term levels of support for the market I gave last week did not hold. The near term levels of support for the S&P 500, Dow, NASDAQ and Russell 2000 are 1356/12,700/2986/782. A key will be the performance of the NASDAQ. This index has been the best performer year to date. Focus on how the NASDAQ acts near the 2986 level. Intermediate term support levels are 1339/12,700/2899/782. How the NASDAQ acts near term will tell us if a test of the intermediate term levels is imminent.

The overall readings are still positive, but they have deteriorated. So, follow the drill. I am weeding out names that are not technically sound and focusing on the names that are performing.

Weakness in Europe put the market and LEI’s under pressure last week. The sentiment component of the LEI’s has been very volatile lately. This has been reflected in the volatility of the market. The momentum in LEI readings has slowed. This is another reason to become more cautious.

With the major indexes near their respective 50 day moving averages and earnings season picking up, volatility will be high.

http://www.financialsense.com/contributors/thomas-j-smith/drill-tells-me-to-be-cautious