How to Play the Change in Market Leadership

Stocks had their best week since the follow-through week in March 2003. However, this market looks completely different from then to now.

The first point is the amount of distribution to accumulation in this market, and that is best seen in the Nasdaq's weekly chart. All that big red volume is distribution, and all you need to know is that it is not bullish.

The second point is that the past leaders of Baidu (BIDU - commentary - Cramer's Take), Garmin (GRMN - commentary - Cramer's Take), Research In Motion (RIMM - commentary - Cramer's Take), Google (GOOG - commentary - Cramer's Take) and Apple (AAPL - commentary - Cramer's Take) are topping out, and the chemical stocks are starting to look heavy.

But the rally was nice, and some nice stocks have shown up that should do well even if the market rolls over and goes to new lows, because they are in sectors that do well in bear markets.

Let's get to the charts:

NASDAQ

Click here for larger image.

Source: TeleChart Gold

Just to put last week's rally in perspective, last week's volume was still below the levels of the previous three weeks. Besides that, you should not let one week of gains blind you to all of the heavy weekly distribution we have seen from April 2006 to now. This market is still not out of the woods yet. Notice the negative divergence in the money-stream indicator to the price? This is another bearish technical development that is not good for bulls.

MSFT

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Source: TeleChart Gold

Mister Softee makes up 6.6% of the Nasdaq, and the fact that the stock had such a bearish intraday reversal on such strong volume on Friday could be a very heavy burden for this market in the short term. The breakdown below the 200-day moving average is also reversing the October breakout, and that is another bearish development.

GOOG

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Source: TeleChart Gold

Google has been a wonderful short since the rollover in December, and the constant heavy distribution in this stock has clearly shifted the trend to the bears. This continues to have a wonderful setup, and if it can get a low-volume rally to the 50-day moving average, I would love to get very short this loved stock.

AAPL

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Source: TeleChart Gold

I am still short Apple since the breakdown below the 50-day moving average earlier this month. This chart continues to get uglier each week, and if the low-volume bounce continues to the 50-day moving average, I am going to get very short this stock.

I am looking to cut my loss in Google and Apple with a close over the 50-day moving average, if the stock doesn't move higher immediately.

Besides, these former leaders that are going to cause this market more pain in the intermediate future, as there are some bullish stocks that are in sectors known to do well in bearish markets.

SPW

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Source: TeleChart Gold

SPX (SPW - commentary - Cramer's Take) is bouncing off the 50-day moving average and nearing a breakout to a new all-time high on strong volume. The stock has had three straight quarters of EPS growth over 43% and sales growth 7%, or higher the past six quarters, and it is in the strong diversified-operations group that is moving up the list of top groups. I am going to cut my loss with a close below the 50-day moving average, if the stock does not move higher immediately.

ECOL

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Source: TeleChart Gold

American Ecology (ECOL - commentary - Cramer's Take) has is a beautiful long-term daily/weekly chart with a lot of accumulation by mutual funds in a bearish market. The stock's EPS is growing 4% or higher the past four quarters, sales are growing 11% and higher the past eight quarters, and EPS estimates for 2008 are for a 15% gain, making it a very strong stock in the strong pollution control services group. I am cutting my loss with a close below the 50-day moving average, if the stock does not move higher immediately.

DAR

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Source: TeleChart Gold

Darling International (DAR - commentary - Cramer's Take) is bouncing off the 50-day moving average and breaking out to a new all-time high, on very strong volume. The EPS has been growing 133% and higher in the past four quarters, and sales have grown 7% and higher the past eight months. Estimates for 2008 are for a gain of 20%. This is one of the best stocks in the very strong agricultural operations group. I am cutting my loss with a close below the 50-day moving average, if the stock does not move higher immediately.

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At time of publication, Hayes was long SPW and DAR, and short MSFT, GOOG and AAPL.

Joshua "MauiTrader" Hayes is CEO, president and founder of Big Wave Trading LLC, a Maui, Hawaii-based stock market advisory service. Hayes also runs BigWaveTrading.com, an online stock market commentary and stock selection service for short- and intermediate-term investment strategies using CANSLIM and other strategies. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. Hayes appreciates your feedback; click here to send him an email.