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The Glamour Stocks: Profit Taking or Something More Sinister?

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No other stocks other than the leaders can have more than a temporary effect on the market's course.
-Joseph Kerr Jr. (1931)

It's not the reasoning; it's the conviction.
-Robert Prechter

When conviction in the generals wanes, the troops often have a hard time holding field position, and the tide can turn.

So, let's take a look at one of the strongest of runaway glamours in the last few months.

3D Systems (NYSE:DDD) has been a rocket since the market upthrust from October 9.

On that day, 3D Systems flushed its 50 DMA, scoring a low of 47.33, which defined the low for a 100% advance in 90 days and degrees of time as flagged in a note on Friday. See here. This satisfies a synergistic time-and-price move that often marks turning points and blow-offs -- at least in the intermediate term.

Daily 3D Systems Chart from September:

It is notable that from the 47 low, a 540-degree advance (90 degrees x 6 "sides" for a true square or cube) is 98.

3D System's high on Friday was 97.28.

Friday's stab down left a Soup Nazi, plus-1 sell signal as 3D Systems traded with authority below the recent swing high (allowing for Friday's intervening plus-1 bar).

Another 3-D printing name, Stratasys (NASDAQ:SSYS), also left a meaningful distribution day.

An hourly 3D Systems chart shows Monday's opening plunge in 3D Systems on the heels of Friday's parabolic 540-degree price square out in 90 degrees of time.

Hourly 3D Systems Chart:

A 50% retrace of Monday's sell-off in 3D Systems ties to around 94.40. If this were to play out, it looks like it would leave an hourly Head & Shoulders, offering a good risk-to-reward short.

This is how, ideally, I like to put the pieces of the short-term and bigger-picture pieces together.

The normal expectation would be for a 3-day decline (including Monday's) and for a possible test of the rising 20 DMA around 85. If 3D Systems has caught a seller, the seller might lift a leg, allowing the stock to bounce. If this occurs at or near the open towards the above 94.40, it sets up what I think is a nice risk-to-reward short for a trade with a stop. A 90-degree decline from Friday's high ties to 87-88.

You hear many money managers in the financial media say that they are bottoms-up stock pickers and don't pay a great deal of attention to the push and pull or to timing of the broad indices. Is as much attention garnered when one of their bottoms-up darlings collects several real distribution days?

It's often said that it's a market of stocks, not a stock market, and this is particularly so since the advance-decline line typically peaks many months in advance of a top in the major indices.

The recent new S&P 500 (INDEXSP:.INX) and Dow Jones Industrial Average (INDEXDJX:.DJI) all-time highs were not confirmed by the NY Composite Advance-decline line -- a bearish divergence.

Of course, the bulls will argue that rising interest rates, such as we've seen lately, artificially depresses the NY Composite Advance-decline line (due to the many non-operating companies in the NY Composite, such as interest rate sensitive closed-end bond funds and preferred stocks), which explains the current bearish divergence.

The chart below shows that the Dow (as well as the S&P) continued up into year end while the advance-decline line peaked on October 29, 2013.

Click to enlarge

This is right in line with the 5-year and the 60-month cycle due around November 2013 (60 months from the November 2008 crash low).

Did the market crash UP 5 years following the November 2008 plunge?

Typically, significant market tops are followed by a 3-to-6-month divergence in the advance-decline line.

We are in the 3-month window. The 5-year anniversary of the March 2009 low is in the 6-month window if the present divergence persists. If the market should turn up and run up again toward March (plus-or-minus a month) and if the bearish divergence on the advance-decline line is maintained, the market will be in a precarious position. I think any further highs without the benefit of the market inhaling and correcting meaningfully puts the market in more jeopardy, not less.

As you know, my expectation has been for a test of prior resistance in the low 1800s SPX. That is not a truly meaningful decline if it plays out. If a test of 1800ish leads to new highs, it may be the Fat Ladie's last aria even though the new highs will be applauded

So, when you see one of the Untouchables like 3D Systems that have hogged the spotlight retreat, it is a possible sign of a further dwindling in the advance-decline line.

Another Untouchable, Amazon (NASDAQ:AMZN) continues working lower, following a Gilligan sell signal on December 27. This ties closely to the square-out flagged in Amazon in this space. See here.

Apple (NASDAQ:AAPL) has also been working lower since a square-out of its own at 568-569. See here. Apple snapped the important 50% pivot at 545 (50% of the 705 all-time high in September of 2012 and the April 385 low) on the Friday weekly closing basis to kick off 2014, following through with a gap lower on Monday. However, after satisfying a flush of its 50 DMA, Apple reversed strongly from a 533.60 low, retracing to the 545 pivot.

The last week of January looks like an interesting inflection point in Apple as January 30 aligns and vibrates off the 705 all-time high and January 25 is 90 degrees square Monday's 533 low.

Another Untouchable, Netflix (NASDAQ:NFLX), flirted with its 50 DMA for the first time since October on Monday.

Daily Netflix Chart from October to Present with its 50 DMA:

Another Untouchable, (NASDAQ:PCLN) undercut its 50 DMA on Monday for the first time in a year before tailing up like Apple.

Daily Chart from January 2013 with its 50 DMA:

Note the picture-perfect tests of the 50 DMA in October and November that led to sizable rallies. Will Monday's action elicit the same behavior?

These are just a few of the generals that should lead the troops if the market is going to win the battle of the January Barometer. Basically, the first five trading days of January have been an excellent predictor of what the month and the year will bring. The first five trading days of January show a high frequency of matching the full month and the full year.

I can't help but wonder if the stealth Gilligan sell signal in the leading Russell 2000 (INDEXRUSSELL:RUT) on December 26 wasn't a precursor to a red flag in the January Barometer.

60-min iShares Russell 2000 Index ETF Chart:

iShares Russell 2000 Index ETF (NYSEARCA:IWM) looks set for a quick test of its 20 DMA.

Ditto the S&P.

The Dow Jones Transportation Average (INDEXDJX:DJT) look set for a quick test of its 50 DMA following Monday's large-range, outside-down day.

Daily Transportation Average Chart from October with its 50 DMA:

Conclusion: The vast majority of bears are looking for "one more rally" before initiating any short positions. This is thoroughly understandable after a persistent one-year advance, even despite cyclical evidence, distribution days, and negative divergences indicating that a more meaningful pullback than we have seen of late is in the offing.

Many an opportunity has been lost waiting for one last rally or decline.
-Robert Prechter

From the impulsive kickoff that began 2013 at S&P 1400 to the all-time high on December 31, 2013 at 1850ish was a range of 450 points. Intriguingly, this is a very Gann-like 450 points, which ties to Gann's 45-degree angles and his book 45 Years In Wall Street.

In addition, on the Square of 9 Chart, 450 is 90 degrees square December 31, the day of the so-far peak. Is there anyone who thinks December 31 witnessed a major high? Somehow it would seem fittingly ironic if an important high played out at the end of a year that ran wire-to-wire with the vast majority waiting for one more rally.

Strategy: Many know what matters; few know when it will matter. In addition to the January Barometer, this week is opposite the first week of July, which vibrates off the 1576 high from 2007. The first week of January is also 90 degrees square early October, which marked the time of the 2007 high and the 2002 low as well as the major 2011 higher low and the recent 2013 pivot low.

If the bulls are going to circle the wagons on the January Indicator, it should begin this week with a turn up into the last week of the month for good measure.

The October 2013 low was 1646.47, which aligns with January 27. From the October low, the S&P has marched up 200 points in a matter of around 90 degrees and days. This is reminiscent of the last ditch 200-point blow-off that ended with the March 2000 top. Consequently, with a break of the prior swing highs just above 1800 S&P followed by a break of the last swing low, the December low warrants considerable caution.

Daily S&P 500 Chart from October to Present with its 50 DMA:

Form Reading Section:

Geospace Technologies (NASDAQ:GEOS) 10-min and Daily Charts:

Twitter (NYSE:TWTR) Chart:

POSITION:  No positions in stocks mentioned.