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After a False Breakout, the Topping Pattern in the S&P 500 Continues


Plus: Despite heading lower, the Nasdaq Composite still hasn't entered a technical correction.

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

Excerpt from's Intraweek Update:

That didn't take long. On Monday, May 12, the S&P 500 (INDEXSP:.INX) and the Dow Jones Industrial Average (INDEXDJX:.DJI) broke out to fresh record highs, but then both stalled on Tuesday, rolled over, and negated their "obvious" breakouts on Wednesday, May 14. Remember that the market is counterintuitive in nature, and when something is "too obvious," it rarely works on Wall Street.
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The action lately is more confirmation that the market is in a broader topping pattern, which began in March 2014 -- exactly five years after the March 2009 bottom. The market is the boss, and I learned many years ago not to force it or fight it. Patience will be rewarded and clean trends will emerge again. It's just a matter of "when," not "if."

Bearish Action Continues

Today the Russell 2000 (INDEXRUSSELL:RUT) hit a new low for the year, fell into correction territory (a decline of 10% to 19.9% from a recent high), broke below the neckline of its head-and-shoulders top, and is now forming a series of lower highs and lower lows, all of which are bearish events.
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The Nasdaq Composite (INDEXNASDAQ:.IXIC) is acting similarly, but it has yet to hit a new 2014 low and is still not down 10% from its March 2014 high. In this environment, breakouts aren't working, and most stocks are treading water, if not heading lower. That's why defense is king until the bulls regain control of this market.

Tepper Top?

After Wednesday's close, David Tepper, billionaire and manager of the hedge fund Appaloosa Management, gave some cautionary comments on the stock market. "I think we're OK," he said of the current investing climate, "but listen -- there [are] times to make money and there [are] times not to lose money. This is probably [a time when] you're supposed to think about preserving some of your money. If you're 120% invested, it's probably too much. You can still be long, but you probably should have some cash."

Tepper was the highest-paid hedge fund manager of 2013 at $3.5 billion and was one of the first people to identify the Bernanke Put several years ago. So when Tepper speaks, the market listens. Thankfully, my firm shares his view and finds itself positioned in a very similar fashion.

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