Rally Monkey on Morphine Drip

A pullback was due at some point, and I want to show you the clues that gave some early warning to today’s action

NASDAQ (QQQQ)
The NASDAQ is normally a leader on the way up and the way down. I mentioned a few days ago that it was 12% above its 50-day (Black Line) and that it had not been that extended since the Market top in late 2007. Moreover, the NASDAQ was at the 200-day (Blue Line) and that is a normal place for a pause in a rally – it is also the line that capped the first real rally in 2002 (all of these notes and charts are archived).

Note that XLE (Energy), OIH (Oil Service), XME (Metals), SMH (Semiconductors) also hit their 200-day averages.

The clue for being nervous was the large volume selling 5 days ago (Red Arrow). The NASDAQ was being distributed and this served as an early warning.

The NASDAQ is now down about 6.8% in 5 days.

Before the NASDAQ topped, Netflix (NFLX) started to underperform the market. Every pullback into the 50-day (Black Line) since December had been bought aggressively. However, 5 days ago, NFLX broke below the 50-day – Big Money wasn’t willing to defend the stock for the first time in nearly six months.

When the leaders start acting differently than they had during the rally, your antennae should alert you that something may be changing.

Over Extended Leaders
I mentioned last week that the likes of AAPL, RIMM, BIDU, GOOG were very extended and due to pull back or at least sit around for a few weeks. The problem with these types of companies, these IBD Top 100 type names, is that they get a ton of momentum money and then when the music stops, everybody tries to sell at the same time. That leads to a violent plunge.

Apple (AAPL) is down about 11% in six days. The last two days have been brutal, on heavy volume. There is a lot of support at $112 and then major support at about $100.

Semiconductors (SMH) have been a leader on this move off the March lows. However, five days ago, SMH opened the day at a new high and then got blasted, closing near the lows on massive volume (Red Arrow).

This was another red flag for this rally. (note, my SMH did not get stopped out today. I bought it low enough yesterday that the Stop Loss has not triggered, yet…).

Retail (XRT) has been another leader on this rally. But it also broke to a new high six days ago and then got hammered, on heavy volume for two days (Red Arrows).

Leaders failing to break out and then getting sold off hard on heavy volume is about as bad as it gets. Remember, this all was going on while the S&P 500 and Dow Jones were holding up relatively well the last few days. Today, the real sellers showed up and took most everything down, hard.

Potential Breakouts Update

Agilent (A)
I noted the other day that there are now potentially bullish setups forming and if Big Money showed up to break them out, then I would be buying. Agilent was an ideal setup, a seven-day, tight trading range after a nice move up. The setup failed today as Agilent broke down and ended the day down about -4.5%.

Commodities
Commodities look overdone and due to pullback. I noted some Fertilizer names the other day, but did nothing with them, because I was afraid that Commodities were too extended.

Fertilizers
Mosaic (MOS) tried to break out today and failed on big volume. Maybe this one isn’t ready yet.

Pan American Silver (PAAS)
I want to own this name, but was reluctant to put in a stop Buy Order at $20. I was reluctant because Silver and the Gold Stock ETF (GDX) had moved so far, so fast, that I thought the prospects of a pullback were high. PAAS rallied up to $20.10 early today and then spent the rest of the day selling off on decent volume.

Gold ETF (GLD)
Again, Gold Stocks have rallied pretty sharply the last few weeks. The looked extended and at a place of obvious resistance. So I held off of buying Gold stocks. Most clients now own Gold via the Gold Metal ETF (GLD). I see less volatility there, but enormous potential.

Metals (XME)
Metals were one of those sectors that I mentioned was at its 200-day, a natural place for a rally to stall. XME was trashed the last five days (-16%) and was down -8.84% today on gigantic volume. Last week I noted that $30 would offer strong support.

I will go through the charts tomorrow morning and see what is holding up and what is pulling back into support in a controlled manner. I will also go through the Sector Bullish Percent Readings to see where the real selling is occurring.