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Recent deterioration in the short-term technical outlook for key indices means now more than ever, investors must take decisive action to lock in recent gains and avoid aggressive buying.

The markets were clearly disappointed early Friday as more cracks developed in Greece’s debt deal. Still, most of the major averages managed to close higher on Thursday. Over the past week or so, the correction camp (those looking for a pullback to buy) has become quite crowded.

This is likely the reason why the market has been grinding higher as late buyers abandon their disciplined strategy and just buy. Many of the market-leading sectors like housing have continued to move higher and have become even more overextended. Further new all-time highs in Apple Inc. (AAPL) have also helped fuel the excessively bullish sentiment.

The latest American Association of Individual Investors (AAII) sentiment survey shows a 7%+ jump in the number of bulls, which now stands at 51.6%. According to Investors Intelligence, over 52% of the newsletter writers are also now bullish. Though neither reading is high enough to suggest a major top, they do raise a further caution flag. (See the results of MoneyShow.com’s latest sentiment survey here.)

The weaker relative performance of the Dow Industrials and Dow Transports suggests that the more speculative sectors are gaining favor. This combined with some deterioration in the short-term technical outlook suggests it is time to tighten your stops and lock in some profits.

At the end of today’s column, you will find a summary of all my executed positions since last October along with the recommended stop levels.

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Chart Analysis: The Spyder Trust (SPY) has closed higher for the past three days after successfully overcoming the 127.2% Fibonacci price target at $133.39 last week.

• Daily Starc+ band is now at $136.90 with the 2011 high at $137.18. The major 78.6% retracement resistance calculated from the 2007 highs is at $138.26
• The NYSE Advance/Decline (A/D) line has made further new highs this week and is well above the July highs (line c), which were surpassed in December
• A/D line is well above its rising weighted moving average (WMA), which is consistent with an overbought market
• The McClellan Oscillator did a good job of signaling the 2012 rally by breaking its downtrend, line d
• The break below the uptrend on the McClellan Oscillator support (line e) is also a sign of weakness. It may drop below zero on Friday if stocks are down
• Rising 20-day exponential moving average (EMA) is now at $131.90 and there is good chart support in the $130-$132 area
• A close below the low at $130.06 will suggest a drop to $128.30-$127.20, if not the flat 200-day moving average (MA) at $125.95

The iShares Dow Jones Transportation ETF (IYT) has declined for most of the week while many of the other major averages have continued to make new highs.

• The daily chart shows a potentially bearish rising wedge formation, lines f and g
• A drop below support (line g) will suggest a drop back to the 200-day MA at $89.50. Calculated from the recent highs, the 38.2% support stands at $86.60, which is over 8% below current levels
• RS line has dropped below its support, line h, signaling that it is underperforming the S&P 500. The weighted moving average is also starting to turn lower
• OBV has broken its uptrend, line I, after forming a slight negative divergence at the recent highs. A lower close Friday would turn it even more negative
• There is initial resistance now at $95.40-$96 with stronger resistance in the $98 area

NEXT: Weak Dow Performance Raises Warning Flag

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