A big black eye of this current uptrend was today’s reversal and closing just off the lows of the session. All was well heading into the afternoon hours as plenty of leading stocks were showing excellent strength. Just as the morning got going news out of China of the government cracking down on e-commerce companies sent the related stocks in a downfall. Stocks like AMZN, BIDU, and SINA and so on were hit hard. BIDU and AMZN have been stalwarts since the March 2009 market bottom and today showed some serious cracks. Late stage breakouts have been common in this uptrend and today may have been the straw that breaks the proverbial back of the stock market.
Small caps continue to be very weak here and failed to keep up with the rest of the market during this uptrend. Even during today’s rally small caps lagged the broader market. In new uptrends small cap stocks are always leaders to the upside and when they lag it is a big red flag. Of course we could see the market reverse course and push higher, but given the action today and 3 days of distribution on the NASDAQ and S&P 500 it is becoming unlikely. On a daily chart IWM has formed a little head and shoulders pattern, pay attention to the pattern. In addition to the head and shoulders pattern check out its relative strength line. IWM is lagging significantly a sign of trouble especially when the RS line hits a new low prior to price hitting a new low.
The catalyst appeared to be the Greek situation getting dire. Greece needs funding to pay its bills and a failure to pay these bills will appear to be a default. A bond default wouldn’t come to December when the next big payment is due to bond holders. At some point the Greeks will give up and default entirely as they simply do not have the ability to pay their obligations. Dragging it out continues to cause uncertainty in the market. For us, we are following price and volume action. Last Friday’s big volume was helped out by options expiry, masking weakness. Right now, weakness has begun to take over and it is prudent to take the necessary precautions.
As always, remember the golden rule on how to invest: cut your losses short!