As the much anticipated pullback finally happened, market participants are wondering if this is just a pause or a top, and trader Joey Fundora of DowntownTrader.com points out key points to watch.
Stocks were sold down pretty good again Thursday as most of the major indices were down over 1%. While not a drastic down move compared to recent years, it was the largest decline in the S&P500 since mid November. While I don't think a top is necessarily in, we certainly have had signs of waning momentum. Price has continued to drift higher for sure, but if you pay close attention to SPY, notice volume has drastically declined over the last few green sessions. This is in sharp contrast to the past two distribution days. In fact, the four highest volume days in the past 12 days have all been red. While price is still acting well overall despite Thursday's selling, volume is definitely hinting at some institutional selling.
While volume is certainly an important indicator to watch, there are other clues confirming that momentum has been declining under the market's hood. The percentage of stocks trading above their 40-day moving averages has actually been dropping steadily since peaking in January. This is certainly worth noting as it reveals a market being led by fewer and fewer stocks.
The McClellan oscillator, a shorter-term indicator, is also revealing a similar pattern. In fact, one could argue that it is almost oversold already, which is not typical with a market one day off fresh highs. There is definitely some distribution occurring, the question is whether it is signaling a pause or a top.
It is much too early to make any such conclusions. I would actually be surprised if the market experienced more than a drop of a few days right now as many participants have missed out on a large chunk of this move. However, I will be paying close attention to what individual stocks continue to do. For a market to continue pressing higher, it needs expanding breadth, not contracting number of stocks making highs. If this behavior continues, I would expect we enter at least a mild correction that could take us to SPY 146 in the next month or two, and possibly into the gap just under that.
By Joey Fundora, Trader and Blogger, DowntownTrader.com