$SPX Daily 03/28/2014: Consolidations don't breed rallies.

29 thg 3, 2014

Well, SPX didn't break out of the symmetrical triangle pattern, though it is back inside that pattern and now closer to the apex. So it's going to break out soon, one way or the other. And not much sign of window dressing, though we still have Monday so we'll just have to wait and see how it goes early next week.

On the chart, I have marked in blue previous consolidation phases and as you can see these usually appear prior to some kind of re-pricing lower. After the consolidation in the December/January period, SPX dropped around 7%. Now we've entered another consolidation and while history doesn't necessarily have to repeat odds are that it will. Look at the recent daily candles and you will see several with long upper wicks known as topping tails. This means that while the market might rally early in the session, sellers are entering and selling into the rallies which eventually overwhelms buyers. This is exactly what happened on Friday.

Also on the chart, I've set up the PPO, thanks to an idea I stole from "Above the Green Line" over at Stockcharts.com, to show the % difference between SPX and its 250 EMA. Back in May of 2013, SPX made a new high and was about 12% above its 250EMA. Since then, each new high has come with a lower percentage difference as the rally seems to be running out of gas. This may not mean much in the short term but I think it has longer-term implications.

Take a look at some of the bubble stocks like NFLX, PCLN, AMZN, TSLA, AMGN, GILD, FB, ADBE, BIDU SBUX, or any of the other Nasdaq high flyers that you thought were way over priced. These stocks are now and have been under distribution and some in a big way. Who is selling? Well, it ain't Uncle Ted and & Aunt Alice because retail investors cannot move the market. As SimGlenn pointed out in a comment to one of my previous posts, it's likely hedge funds who are dumping shares of these overpriced darlings.

Of all the sectors out there, there are only a few that are holding the market up at this point: semi conductor, telecom, energy, commodity-related, and agricultural-related stocks. Almost every other sector is either consolidating along with the major indexes or dropping. We lose another key sector, especially the SOX, and there's no way the market is going up so it's going to be very important to watch SOX, XLE, XTC, & DBA over the next few days to make sure none of these come under pressure, IMHO.

No one likes these consolidation periods because indicators and oscillators don't give reliable signals. You go sideways long enough and MA's will have bearish crosses that can't be trusted. At some point in the future, we're going to get back into a trend and that trend, whichever direction that happens to be, is likely to dominate market action for quite some time. Until then, be careful and don't let your personal heuristic color your decisions. Instead, wait for the market to show its hand and then go with it.

All IMHO and subject to change without notice.

GL in the week ahead.