The new record highs has some analysts throwing caution to the wind with their euphoric forecasts, but MoneyShows’s Tom Aspray recommends a risk-focused approach and suggest you avoid one sector in particular.

It was a stellar week for the stock market as the late buying pushed all of the major averages into positive territory. It was hard to find a bearish voice after Friday’s close but most investors do not benefit from the advice of these analysts. Overnight data from China was better than expected and the futures are higher in early trading.

One well-known technical analyst said Friday that he would buy the market now. Unfortunately, the interviewer never asked the follow-up question as to what it would take for him to change his view or what type of stop he would use on this position.

Now, while I would also expect the market to be significantly higher between now and the end of the year, that does not mean you should buy everything and at any price. I think that the regular investor or trader must pay attention to the risk of each investment.

The further improvement in the market internals noted on Friday continues to favor the long side of the market but not at any price as most of the major averages are quite overextended. The charts below reveal the hazards of chasing the index-tracking ETFs and also why one sector should be avoided.

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Chart Analysis: The daily chart shows that the Spyder Trust (SPY) closed Friday at $167.51, which was not far below the quarterly R1 resistance at $168.48.

  • The daily starc+ band was tested last Thursday and is now at $169.71. The prior intra-day high was $169.07.

  • The quarterly pivot is at $161.01 with the last swing low at $159.86, which was the June 28 low.

  • A stop at this level would mean a loss of 4.8% but a more comfortable stop would be under the June lows at $157.42.

  • A drop below this level would mean a loss of 7.8% for those who bought Friday’s close.

  • The daily chart has initial support in the $165 area, which is 1.5% below last week’s close.

  • There is better support in the $163-$163.40 area, which includes the rising 20-day EMA.

  • The NYSE A/D line broke its downtrend, line b, on June 28 and made marginal new highs Friday.

  • The A/D line would need to decisively break below the June lows to weaken the outlook.

The PowerShares QQQ Trust (QQQ) was almost 1% stronger than the SPY last week and closed at $75.30, which was above the daily starc + band and the quarterly R1 resistance.

  • The weekly starc+ band is at $76.68 with the quarterly R2 at $79.10.

  • For longs established on Friday’s close, the tightest stop would be under $71.03 or the late June low of $70.78.

  • This would be a risk of 6% while a stop under the June low of $69.15 would be a risk of 8.2%.

  • The daily relative performance surged last week but is still below the resistance at line d.

  • The sharp rise in the OBV last week reflects heavy buying as the downtrend, line f, was overcome on July 3.

  • The gap between the OBV and its WMA is quite large (see ellipse #3), which also reflects an overextended market.

  • The gap at $73.62 to $74.25 is the first support with the rising 20-day EMA at $72.67.

NEXT PAGE: Avoid This Lagging Sector

Tickers Mentioned: Tickers: SPY, QQQ, X, STLD, NUE