XLK, XLE, XLB Setting Up Nicely

The Technology, Energy, and Materials sectors are setting up the best for a position trade. I would not buy these names here because I anticipate a pullback in the market. I think over the next few months these sectors will be in a position to launch a very nice rally.

XLK- Technology

XLE- Energy

XLB- Materials

Market Losing Momentum, In Congestion Zone

There is now a negative divergence in Advancers and Upvolume, along with multiple levels of resistance. I wouldn't be suprised to see the S&P fail around these levels.

2002 Nasdaq vs. 2009 Homebuilders

The S&P Homebuilder Index has been declining since early 2005, well before the market peaked in 2007. The issues in the real estate market bled into the financials, and eventually caused the worst decline in the stock market since the Great Depression. We can use the Homebuilder Index as a proxy for the real estate market, and track the portion of the market that "caused all the problems".

Below is a weekly chart of the S&P Homebuilder Index, with the relative strength line plotted in the lower portion of the chart. Since late 2007 the Homebuilders have started to stabilize relative to the rest of the market. This is important because the real estate market is going to need to recover before the rest of the market can sustain any positive action.

S&P Homebuilder Index
The same thing happened during the bear market that occurred at the beginning of this decade. The burst bubble in the early 2000's was caused by technology companies, which can be gauged by looking at the Nasdaq. In the chart below you can see that the Nasdaq's performance relative to the rest of the market had to stabilize before the market could start the next bull market.

Nasdaq- 2000-2003 Bear Market

Small Bounce to end the Month

The Dow rallied back up to it's 5 day moving average before selling off. Tomorrow will be an important trading day. I think we will end up going down from here.

DIA- 60 Minute
If we do continue to rally however I don't think we will go far. The 150 day moving averages of all the major indices are sloping down. It is very tough sustain rallies when the long term moving averages are positioned as they are.

S&P 500
The picture is the same for almost every industry. Of the major industries I track, only 3 are above their 150 DMA. Those would be Gold Miners, Retailers, and Internet companies. Of those three, on the Gold Miners have a 150 DMA that is not sloping steeply downward.

I think it's likely that the market sells off soon. I will note however that there are some industries that could buck the trend. Some of the more oversold industries, such as financials and commodity names, could continue to rally quite a ways before they start to flirt with their long term moving averages.

Broad Based Selloff

The market sold off hard today on news that the White House forced out CEO Rick Wagoner. Decliners to Advancers was 5-1, and Downvolume was up substantially. I pointed out last week that Advancers and Upvolume have been weakening. Looking at that chart today does not make me want to own stocks. I think this is the end of the recent counter trend rally.

S&P 500- Advancer and Upvolume
We broke the recent uptrend and the 5 day moving average. I think it's possible we could rally back towards the 5 DMA, but we will probably fail there. That would be a good place to try to get short.

S&P 500- 60 Minute
The Dow has been weak relative to the other major indicies. I shorted the Dow today via a long position in the DOG. The Dow failed to rally back above it's January lows, while the QQQQ, SPY, and IWM all managed to at least penetrate those levels.

DIA

Watching Breadth

Here is a chart of the S&P with a 10 day moving average of advancers and upvolume plotted below. There have been multiple times within the past year when divergences in these indicators predicted a turning point. There is a possible divergence forming right now (highlighted in yellow).

741 Remains Key

The market didn't do much today. It made a push early on to make a new high, and the sold off the rest of the day. We did get a little bit of a push around 2:00, but that sold off as well over the last 20 minutes.

There is a level of resistance at 735, as well as the November low 0f 741, that need to be taken out if this rally is going to continue.

S&P 500 (10 minute)

Big Move 3/10

The market made a nice move today, with most major indices up over 6%. The S&P ended up breaking out of it's trend channel late in the day. We'll see if it can sustain this rally or if it was another head fake. As I've been saying for a while, 741 will be a big level for the S&P to get above and hold. If it then this rally could have some legs.

S&P 500 (60 minute) In terms of breadth the market had a very good day. About 90% of the Russell 3000 was up today. The interesting thing was that there was no dominant PV Relationship. 1489 issues were PUVD, while 1224 were PUVU. I would like to have seen more dominance from the Price Up Volume Up catagory. We had a similar rally similar to this one (although the rally in October was larger) that only lasted for about a week or so. On the day we bounced in October we had over 2,000 stocks that were PUVU. If the rally wants to hold I'm all for being bullish, I'm just having a hard time doing so right now.

PV Relationship

Trader Mike pointed out this chart on his blog.

BKX Bank Index

Even though the Bank Index was up 15%, it only made it to the middle of it's trend channel. He said he expects the sellers to come back into the market towards the top of this channel. With the structure of price and it's moving averages, I don't see any reason to try to jump on this rally.

Lastly, lets look at the weekly timeframe. If the short term bottom put in this week does hold, there are some positive divergences that would be very bullish for the overall market. We have had lower highs in the VIX and the NYSE New Lows. If the Summation Index holds above it's prior low, that would be a very bullish sign.

S&P 500 (Weekly)