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Three Charts to Send to All the Bullish Traders You Know

By Jeff Clark
Thursday, September 12, 2013

It has been a marvelous week for stocks.
 
By the end of the day Wednesday, the S&P 500 had rallied from 1,635 to 1,689 in seven trading days. That's a gain of over 3%. Not bad for one week.
 
There are signs, though, that this bounce is nearing an end. The same signs that had us looking for a bounce a few weeks ago are now warning of a potential decline...
 
 
 
This measure of overbought and oversold conditions has been especially volatile lately. The recent action looks similar to what happened following the June bottom in stock prices and leading up to the August decline.
 
At the very least, the McClellan Oscillator suggests stock prices are extended to the upside right now. Stocks will have a tough time holding onto any further gains, and there's a strong possibility of a pullback.
 
The Volatility Index (the "VIX") is also sending a warning sign...
 
 
This 60-minute chart of the VIX shows a bullish falling-wedge pattern. Most of the time, charts break this pattern to the upside. This should lead to a sharp move higher for the VIX.
 
Since a rising VIX usually happens with a falling stock market, this is another sign stocks may be heading for a rough patch.
 
Finally, let's take another look at the Banking Index (the "BKX")...
 
 
Bank stocks tend to lead the stock market. A strong market needs a strong banking sector. As you can see from the chart, though, the Banking Index broke down from its uptrend a few weeks ago. The recent move down has pushed the index back up toward its breakdown point and the natural resistance of its 50-day moving average.
 
With the broad stock market already extended and approaching overbought conditions, there's probably not enough energy left to power the BKX above this resistance level.
 
If the Banking Index pulls back from here, look for the broad stock market to follow.
 
Best regards and good trading,
 
Jeff Clark




Further Reading:

Jeff thinks the recent bounce is setting the stage for some low-risk short sales. And he says three leading sectors look especially vulnerable. Get all the details here.
 
"Short-selling is an important strategy for any portfolio," Jeff says. "Stocks move up and down. If you're only investing on the up moves, you're only taking advantage of half the opportunities." Get all the tools you need to make money on short trades here and here.

In The Daily Crux
Market Notes
Big Pharma stocks Johnson & Johnson, Pfizer, and Bristol-Myers Squibb are up 50%-plus over the past two years, including dividends.
 
Defense giant Lockheed Martin hits a new all-time high.
 
European recovery continues as Germany (EWG) and U.K. (EWU) funds hit new multiyear highs.
 
Steel companies are in a "bad to less bad" rally... Arcelor Mittal and U.S. Steel surge to five-month highs.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1689.13 +0.3% +17.8%
Oil (USO) 38.48 +0.4% +6.6%
Gold (GLD) 131.70 +0.0% -21.6%
Silver (SLV) 22.29 +0.8% -31.2%
U.S. Dollar 81.52 -0.4% +2.1%
Euro 1.33 +0.3% +3.5%
Volatility (^VIX) 13.82 -4.9% -15.8%
Gold Stocks (^HUI) 242.69 +0.7% -49.2%
10-Year Yield 2.92 -1.4% +71.8%

World ETFs
Symbol Price
Change
52-Wk
Japan (EWJ) 11.62 -0.7% +29.5%
Israel (ISL) 14.81 +0.4% +25.4%
USA (SPY) 169.40 +0.3% +20.3%
China (FXI) 38.50 -0.8% +18.6%
Taiwan (EWT) 14.16 -0.3% +11.4%
S. Korea (EWY) 61.97 +0.5% +8.7%
Canada (EWC) 28.40 +0.5% +0.8%
Singapore (EWS) 12.97 +0.0% -0.2%
India (IFN) 19.59 +0.8% -1.4%
S. Africa (EZA) 63.80 +1.9% -2.2%
Russia (TRF) 14.34 +0.6% -5.3%
Lat.America (ILF) 38.26 +0.1% -8.0%

Sector ETFs
Symbol Price
Change
52-Wk
Biotech (PBE) 34.97 -0.3% +47.9%
Media (PBS) 22.90 +0.5% +41.7%
Defense (PPA) 27.56 +0.6% +40.6%
Alt. Energy (PBW) 5.92 -1.2% +40.4%
Health Care (IYH) 107.96 +0.5% +32.0%
Construction (PKB) 20.04 +0.2% +31.7%
Retail (PMR) 32.38 +0.2% +30.2%
Transportation (IYT) 118.10 0.0% +30.1%
Industrials (IYJ) 90.35 +0.4% +29.1%
Financials (IYF) 74.26 +0.1% +28.4%
Consumer Svcs (IYC) 108.91 +0.7% +28.4%
Water (PHO) 23.38 -0.1% +21.1%
Software (PSJ) 32.99 +0.2% +19.4%
Insurance (PIC) 19.01 +0.1% +18.3%
Semis (PSI) 17.18 -0.5% +17.0%
Big Tech (QQQQ) 78.09 -0.2% +15.7%
Telecom (IYZ) 27.77 +0.7% +14.7%
Nanotech (PXN) 6.95 +0.6% +11.1%
Basic Mat (IYM) 74.29 +0.7% +10.6%
Utilities (XLU) 37.04 -1.0% +5.7%
Real Estate (IYR) 64.36 +0.7% +0.7%

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