Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
This morning futures are up for (insert convenient reason here). The reason of the day is a German investor confidence report but if that’s the main cause, it was a market that wanted to find an excuse to go up short term. Futures took a U-turn overnight from down about 5 to up about 5 and have added to that gain as the morning progressed. That’s a fortunate development for the bulls as the situation looked quite dire with the break of 1370 in the overnight session. Recall late last week I said the area between 1370ish to 1390ish is a “white noise” area and not much stock can be taken of what happens in that area. However an open well below that level, as it looked like about 6 hours ago, would not have been a positive.
Pulling back a bit, yesterday’s action was among the most tricky of the year. The market gapped up – and then immediately gave back all those gains within the opening half an hour. That usually leads to a very bad day. Instead the market moped around, and only the NASDAQ was hit. While the DJIA actually was up quite strongly. And S&P 500 flattish. A strange divergence indeed. The NASDAQ has been the leader of the pack in 2012 and hence it sure needed to ‘catch up’ (in this case down) to the rest of the major indexes – yesterday was one step towards that goal.
The market “generals” began getting hit in earnest last Friday and that continued yesterday – headlined by Apple’s 4% drop. The “teflon” stock is now down 5 sessions in a row, and might actually be short term oversold if you can believe it. But let me call your attention to the bottom of the graph – see that heavy volume? That is quite ominous to me. It speaks of distribution.
Priceline looks very similar in that the drops are on substantial volume versus the pops up of late. This smells of the big boys selling.
Notwithstanding the morning’s gap up, we might be building what is called a “bear flag” on the indexes.
Technically speaking, a bear flag is a sharp, strong volume decline, several days of sideways to higher price action on weaker volume followed by a second, sharp decline to new lows on strong volume.
We saw that initial drop, on volume, over the past 2 weeks. We now could be in the “several days of sideways to higher price action on weaker volume” stage. Note again the volume bars at the bottom of the chart. On those 2 up days last week volume lagged versus the down days. If the bear flag is to play out it could pose an interesting situation towards the end of this week to early next.
The larger issue from this viewpoint is a lot of “go to” stocks are breaking down. Yesterday’s gains were in consumer staples (hide out stocks) and a lot of areas that have shown weakness the past few weeks. A lot of broken charts were the ones that led the charge yesterday. So the benign index action hid a lot of weakening charts. Hence, for those looking to enter or add to new positions the choices are thinning or differing. And the high growth names are the ones withering away. In the end we can stare at the indexes all we want but the market is made up of individual stocks, and many of those charts that were holding up even as the market went sideways in latter March are now signaling sell or at best caution.
Of course we should always look at the opposite view and a bullish take on this would be “we are getting a long needed rotation into new groups”. My issue with that is those groups are mostly defensive.
The next few days will be tricky because some of the high octane stocks are now short term oversold after being taken to the shed the past week and are due for at least a short term bounce – and we have some key earning reports. Tomorrow we have IBM’s earnings report which is to the DJIA what Apple is to NASDAQ, since the DJIA is price weighted and IBM is a $200 stock. So the DJIA is going to effectively be “IBM” on Wednesday.
Anyhow if we are in a bear flag this week is going to be the most dangerous stage of the larger correction since this is where people will let the guard down and say “well I guess that was it”. If however that *WAS* it, and a new leg up is starting (i.e. correction over) then ignore this post. 
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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
