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Wednesday, October 9, 2013

Going Defensive

 I have been waiting for the Elder impulse chart to flash a sell signal, which, during bull phases, are false alarms and generally are very good buy signals. The trouble is, if it proves to be valid, then the market has changed to a bearish phase and you will have to get out quickly. Well, we got the sell signa, but it has now proven to be valid, so that means we are in a bearish phase, the severity and length of which has yet to be determined. It could reverse tomorrow, or we could be in for several weeks of further dropping. Whatever the outcome, it appears that the market, which in my opinion has been forming a long term top, has weakened considerably since this rally took off last November.

 The Nasdaq has begun to under perform, something you would expect in a bearish phase. This bounced off a support level today, but may be in for another test in the near future. Volume has been very high here, and it is the leading areas of the market that have been getting hit the hardest. That does not happen in minor pullbacks.
he overall market seemed to start weakening about the time that the NYSE composite reversed trend and began to out perform the SPX.  That could be a coincidence (out performance by the NYSE earlier his year didn't seem to make a difference), but most of the defensive areas of the market are here.

TickerRelative Strength Index (14)
XLU48.47
XLB44.29
XLK41.07
XLI40.94
XLE40.4
XLV39.55
XLF39.19
XLP39.09
XLY38.99


Here are the sectors ranked by RSI. In only one week we have had a near mirror image flip here; only XLP among the defensive sectors has not moved up. The former leading sectors XLI and XLY have moved down sharply.
While nearly every other area of the market is collapsing, XLU is rising and actually gave a buy signal today. It will take a few days to see if it is valid, but if so, we might be in for a serious correction coming. Judging by the volume we are getting here, it just might prove to be valid.

XLY had been holding up extremely well since mid September, out performing the SPX while moving sideways, and it looked like it might be ready to break out. No such luck - the sell signal proved to be vaild. We did get a bounce off support today, but that may turn into a shorting opportunity.

For a second day the market leading areas took a horrible beating. This is usually a warning that the market has topped, and we are in for a pretty long correction. So far, until proven otherwise, that may be waht is happening now. It's time to get defensive.

I will have the new highs update shorty.


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