Just like dominos, the BUY signals on the DP Scoreboards are toppling and we're finally seeing some deterioration on the NDX. With Facebook (FB) and other technology stocks taking it on the chin the past few days, the NDX is finally succumbing to the downside pressure. A look at the Scoreboards below does tell you that the NDX is still showing relative strength amongst them. I would like to take you on a walk through these four indexes from strongest to weakest based on the arrival of the latest bear signals.
The recent breakdown from the bearish rising wedge occurred yesterday and despite a small bounce today, the negative momentum was too much and the PMO dropped below its signal line. I'm looking for support to be found at the previous March low. If that support level fails, look for a retest of the February low. We're still waiting on a Short-Term Trend Model Neutral signal and that should arrive as long as price remains beneath the 20-EMA. A ST Trend Model Neutral signal is triggered when the 5-EMA falls below the 20-EMA while the 20-EMA is above the 50-EMA. If the 20-EMA < 50-EMA the negative 5/20-EMA crossover is a SELL signal. A DP "Neutral" signal means you are in cash or fully-hedged. The 50-EMA held up as support for the NDX on the last bottom and it appears it wants to provide support this time around too. The NDX needs to get healthy. Technology is an aggressive sector and if we see money rotate out of technology, it suggests traders are ready to move on the defensive.
After bouncing off the 200-EMA, price rose nicely. Unfortunately a double-top has appeared, not only on the SPX, but on the OEX and Dow as well. The rising wedges have executed and now it is time to watch for a test of the confirmation line at about 2650. The charts of the OEX and Dow have similar set-ups. At this point, I think we are in for more decline to test the previous bottom. I agree with my co-host Tom Bowley on MarketWatchers LIVE that currently we aren't seeing sector rotation out of the aggressive sectors like cyclicals, financials and technology. A deterioration of the NDX could be the first cracks in the foundation for technology. If we see money begin rotating into defensive areas of the market like consumer staples, healthcare and utilities, then we can concern ourselves about a bear market. For now, I see it as a correction off the parabolic rally.
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