Weaker Numbers and Weaker Charts

Economic releases continue to disappoint. 8 of the last 11 PMIs have come in below expectations. When those numbers are trending higher the market tends to go higher. Downside surprises lead to declining markets. Investor sentiment, which can at times be a great contrary indicator, weakened significantly last week. Consumer sentiment has waned precipitously over the past few weeks. This is perhaps being caused by further unrest over European markets.

The French brought in a Socialist to lead things there over the weekend. This led to a sharp selloff in Asia and a steep decline in the futures markets here. But, the trading day has seen buyers come in and actually move the market higher this morning. 

The technical picture for the market has weakened significantly over the past several weeks. At this point, however, I am not willing to turn bearish on the overall market. I have warned over the past few weeks not to focus solely on the levels of the major averages. We need to focus on key technical levels for all the stocks we own. If I become mesmerized with just the major market indexes I can lose sight of individual names in my portfolio that have entered into their own private bear markets.

65% of the stocks in the S&P 500 are in sound shape technically. That number sounds fairly attractive in a vacuum. However, the reading was off 8% last week and is 19% off its early March high. The trend is not our friend in this case. Charts for smaller cap stocks are also weakening significantly. 59% of small cap stocks are either basing or advancing. That reading is down 11% from a week ago and 26% from the high. So, it is imperative that I weed out stocks that are not performing as they weaken technically. 

The major indexes fell below their respective 50 day moving averages and then rallied back above those key levels over the past few weeks. Now after the selloff last week the major indexes have again fallen below their 50 day moving averages. This is a sign of stocks being distributed. When the entire market is trading below its 50 day moving average it is becoming increasingly difficult to pick winners. 

Here are the critical support levels for the S&P 500, Dow, NASDAQ and Russell 2000: 1356/12,700/2945/782. If all of these important levels give way selling will intensify and the pullback in the market will accelerate. If a positive divergence develops we will see an attempted rally in the market. Here are the important resistance levels: 1423/13,340/3135/869.

With the market trading below the 50 day moving average the burden of proof has been shifted to the bulls. Bulls need to defend support levels and prove they can sustain rallies and challenge resistance levels. Do not become overly focused on just the major market averages. I will closely watch key support levels for every name in my portfolio. If individual stocks begin to break down and I will be selling. 

There is the weekly update for the drill. Keep focused on the names in your portfolio. We should all keep a sharp eye on the markets as we near the support and resistance levels I gave above.