When Leaders Lose Support
Jack Steiman
12/22/06 - 03:20 PM EST
This column was originally published on RealMoney
on Dec. 22 at 8:01 a.m. EST. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney,
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Certain leaders in certain sectors tell us whether a market is healthy in the short term. For instance, among the semiconductors, we look to
Intel (INTC Quote),
Broadcom (BRCM Quote) or maybe even
Texas Instruments (TXN Quote).
For brokers or financials, we go to
Goldman Sachs (GS Quote) or
Bear Stearns (BSC Quote). When we think of an important sector like the transports, we think first of the giants like
FedEx (FDX Quote). When we think of tech, we think of the leader of leaders:
Apple (AAPL Quote).
On Wednesday and Thursday in the Columnist Conversation, I
posted about the erosion of Apple as it failed on its 60-minute chart to take back its lost 50-day exponential moving average. It fell hard when it backtested this level.
On Thursday, the stock started to lose a far more important 50-day exponential moving average: the one on its daily chart at $84.12. This 50-day EMA was cleared to the upside in July, and Apple never looked back as it climbed higher and higher. But Thursday's action is very important, as it marks a total change of character. It is extremely unusual for a stock of this magnitude to not fight at its 50-day EMA.
Normally, after five months, this test would be a huge buying opportunity, but that's not the case. The fact that the bulls didn't support it is very odd. This too is a change of character.
The behavior of FedEx is almost the same, except that it's dealing with its 200-day EMA. It has already lost its 50-day EMA, which is even more bearish than Apple's situation. However, make no mistake, both are considered near-term bearish.
A week ago, FedEx lost its 50-day EMA at $113.85, but at least it put up a fight. It's almost unheard of for a stock of FedEx's stature not to get a huge lift upward off its 200-day EMA, especially after recently losing its 50-day. It's some strange, unusual action.
As you can see from the charts, FedEx and Apple are getting oversold, so a bounce could occur at any time. However, stocks can remain oversold for long periods of time when important breaks of support occur. Notice also the high volume on recent selling, which isn't something you should ignore.
So why is this happening now, at such a bullish time of year, when all we hear is how the big money doesn't want these stocks to fall because of bonuses and tax-selling purposes? After all, the higher their gains, the higher their bonuses. Plus, why would anyone want to sell these stocks and have to claim the taxes involved after such huge gains?
The answer is in the sentiment readings and in seeing what the commercials -- or smart money -- think is ahead of us. The commercials are the second-most short they've been in two years, which means they see some selling in the near future. Last time they were this short was in December 2004, and the market took a strong hit lower in January.
In addition, the sentiment at Investors Intelligence is at a very complacent 38.2% more bulls than bears. This is a fairly lethal short-term combination. The commercials always take precedence, but when you add complacency to the picture, you have a short-term sell signal.
None of this signals a long-term crash, but it surely is a red flag for the near term. Avoid chasing breakdowns just because the stocks are as loved as FedEx and Apple surely are. There are times to stay clear, and for now, this is one of those times. Obey the message while it's in play.
Often, when stocks break down, they will retest those breakdowns from underneath, so be prepared for that in the days ahead, especially since they are getting oversold.
Finally, the
Nasdaq is at the bottom of its current triangle, and thus a bounce here can't be ruled out. Play it cautiously, please.
