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Topping Process Continues in the Nasdaq Composite and Other Major Indices


The S&P 500 is the only major index that still remains positive for the year.

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+.

The following is an excerpt from a intraweek update sent yesterday:

Market Update: Topping Process Continues, More Bearish Evidence Mounting
The major averages continue tracing out large topping patterns. Last month's lows need to be breached before the topping pattern is confirmed. Conversely, if the bulls continue to quell the bearish pressure and send stocks above resistance, this will be a large base after last year's strong rally. The jury is still out on which way the market will go (break out or break down), but I'm seeing more and more bearish evidence show up on my radar each week. Financial stocks have joined the bearish party as Bank of America (NYSE:BAC), JPMorgan (NYSE:JPM), and Citigroup (NYSE:C) are all acting awful and breaking important support; the group is a very important proxy for the overall market. In fact, Bank of America and JPMorgan broke below two-year upward trend lines, which isn't "healthy."
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The 5-Year Mark: An Aging Bull
Over the past few weeks, I've discussed how this bull market is aging. It turned five years old in March, and prior bull markets have topped out on or shortly after their fifth anniversary.
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Interestingly, this market got in trouble and a top began to form in February and March of this year, which is exactly five years from the March 2009 bottom. Since then, biotechs, high-beta, and growth stocks have been all acting awful, and now the financials (and possibly housing stocks) are joining the bearish party.
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Living Above and Below the 50 DMA & Downward Trend Lines
The Nasdaq Composite (INDEXNASDAQ:.IXIC) and the Russell 2000 (INDEXRUSSELL:RUT) topped out in March 2014 -- exactly five years to the month from the March 2009 bottom -- and they're now forming large head-and-shoulders topping patterns. The patterns will be confirmed if and when their necklines are broken.
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Conversely, if they break out above their 50 DMA lines and downward trend lines, this would be somewhat bullish, and it suggests that a new leg higher might follow. But until then, they are "living below their 50 DMA lines," and that's not ideal for the bulls. Meanwhile, the S&P 500 (INDEXSP:.INX) and Dow Jones Industrial Average (INDEXDJX:.DJI) are outperforming and living above their 50 DMA lines. This is what I've called "the tale of two tapes."
The Next Move Wins
From where we sit, all that matters is support and resistance. Once either level is broken, the market has an interesting way of surprising most people, most of the time. Until then, by definition, one should expect this sloppy sideways action to continue.
Seasonal Weakness
Last month, I posted a chart showing that since the March 2009 bottom, the second quarter has been the weakest quarter of the year for the market. This year appears to be following the same script. It's also May, and the old Wall Street adage "sell in May and go away" comes into play. In strong bull markets, that adage goes out the window, but now that the Fed is tapering quantitative easing, the bull market has turned five years old, and the market is in a topping process, this time may be different in the aging bull market.
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US Stocks Are Not Performing Well This Year
As of Tuesday's close (May 6), all the major averages are down for the year except for the S&P 500, which is only up less than 1%.
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This hasn't been an easy five months, and I expect that the easy money to be made for this cycle is likely behind us. So now, more than ever, it's important to tune in and stay in gear with me as we navigate this tape together. Remember that cash is a position. There's nothing wrong with being patient and waiting for new trends (up or down) to emerge.
Portfolio Update
Thankfully, my portfolio has done well on a relative basis, considering how weak the market has been this year. There are still a lot of earnings reports coming out, and I want to see how some of the following important stocks react to these reports: Jazz Pharmaceuticals (NASDAQ:JAZZ), Tesla (NASDAQ:TSLA), SolarCity (NASDAQ:SCTY), Priceline Group (NASDAQ:PCLN), and Valeant Pharmaceuticals (NYSE:VRX), to name a few.
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