FINANCIALS AND RETAILERS PULL OVERBOUGHT MARKET LOWER
DOW AND S&P 500 PULL BACK FROM RESISTANCE ... Yesterday I wrote about some of the major market averages being up against chart resistance and in an overbought condition. That combination probably helped lead to today's profit-taking in the overall market. Chart 1 shows theDow Industrials backing off from its summer highs along 10700 and a 9-day RSI line in overbought territory over 70. Chart 2 shows the S&P 500 meeting resistance at the down trendline drawn over the August/September highs. The Commodity Channel (CCI) Index for the S&P has been in overbought territory over 100 and is starting to weaken. A lot of recent market leaders led the day's declines including airlines and brokers. The financial sector suffered a downside reversal day while retailers pulled the consumer discretionary sector lower.
Chart 1
Chart 2
FINANCIALS AND RETAILERS HAVE BAD DAY ... Financial stocks have been market leaders of late. Chart 3 shows the Financials Sector SPDR (XLF) recently breaking out to an all-time high. Today, however, an overbought XLF suffered a downside reversal day on heavy volume. A downside reversal day occurs when an index opens higher and then closes lower. It carries more of a warning if the day's range is wide and volume is heavy. It's usually a sign of a short-term top. Chart 4 shows the Consumer Discretionary SPDR (XLY) falling back below its 200-day moving average. Most of the selling came from a weak retail group.
Chart 3
Chart 4
TARGET LEADS RETAILERS LOWER ... The retail group lost 2.3% and was one of the day's biggest losers. The daily bars in Chart 5 show that the Retail Holders (RTH) suffered an "island reversal" today. That occurs when a daily bar like yesterday's (see red circle) stands out with a gap before it and after it. An island reversal usually signals a short-term top. Three out of the five biggest percentage losers in the S&P 500 were retailers. The worst was Target which gapped down over four points on massive volume. The relative strength ratio beneath the RTH chart shows that retailers have been market leaders since late September. That's another reason why today's heavy retail selling may have unsettled an overbought market.
Chart 5
Chart 6
OVERBOUGHT NASDAQ SELLS OFF ON VOLUME ... Yesterday I also showed the Nasdaq Composite in an overbought condition. Today it lost more than fourteen points. This is the first time the Nasdaq has sold off on rising volume since the last week in October. The Commodity Channel (CCI) Index has been in overbought territory and is slipping beneath the 100 level. That's usually a sign of a short-term top. There's no telling at this point how much the Nasdaq may pull back. In the past, however, it has often retraced at least three-eighths of its previous uptrend. If that happens this time, it would suggest a pullback to bottom of the gap area near 2140. The other possibility is that the Nasdaq (and the rest of the market) enters a sideways consolidation pattern to work off the short-term overbought condition. Either way, today's action appears to have marked a short-term peak in the market's fourth quarter rally.
Chart 7
