A startling number of the financial instruments I track each day are nearing resistance levels that could trigger a large-scale downdraft in the major indices. While there's little evidence of an impending turn in the current uptrend -- at least not yet -- the sheer bulk of these mini-signals could be flagging tougher times in the weeks ahead.

The proximity of major resistance demands a more cautious approach by shareholders who have "loaded up" in the last few weeks. First, tighten your stops to protect recent gains. Second, raise cash by dumping underperforming issues and taking partial profits on open positions. Third, shift a chunk of capital into stocks and sectors that have room to run in a weaker market environment.

At the top of my worry list, the S&P 500 index futures are now trading just under the February swing high near 875. This level has stood out as a technical target since the recovery began in early March. The Nasdaq 100 futures contract is nearing its own line in the sand, closing Tuesday's session less than 70 points under the 200-day moving average.

Apple (AAPL) -- Daily
chart
eSignal

Scanning through my watch lists, rallies into resistance are prevalent across many sectors and trading venues. Just check out Apple ( AAPL), which has now entered the massive Sept. 29 gap. In technical terms, the filling of a big down gap is bearish because the fill level, near $125 in this case, will trigger a host of fresh sell signals.

That's not to say I expect a decline to the bear-market lows on this stock, or the rest of the market universe for that matter. But the six-week recovery attempt shows few pullbacks or consolidation patterns. This "verticalness" exposes the broad market to a relatively deep retracement that gives up 50% to 62% of the March-into-April gains. In Apple's case, that decline would translate into a selloff that tests $100.

Of course, this is a two-edged sword. If you loaded up on stocks, a downturn will cut significantly into your profits if you don't take defensive measures. However, if you missed the bulk of the rally because it's been so fast and furious, a pullback lasting two to four weeks will let you buy your favorite issues at lower prices.


KBW Bank Index (BKX) -- Daily
chart
eSignal

The KBW Bank Index (BKX) is probing the broken November low after Thursday's breakout pushed above two-month resistance at 31.50. The index broke that level in January, selling off through the Nov. 21 bull hammer. The current buying surge has now pushed into the shadow of that candle, which marks the lower end of a resistance zone that runs up to 39.

This pattern greatly increases sector risk, with major earnings reports coming up later this week and into the end of April. In fact, the entire group has enjoyed such a strong run since March that it's hard to imagine anything other than a sell-the-news reaction in the weeks ahead. Indeed, reality could be setting up to make an unpleasant comeback throughout the financial sector.


Copper Futures -- Daily
chart
eSignal

Major commodity groups are nearing major resistance levels as well. For example, the copper futures contract, which has been acting very well in recent weeks, finally tagged 200-day moving average resistance on Monday. Amazingly, this is the first time the instrument has touched this key level since July of last year.

In addition, take a close look at that blue line because it marks a major breakdown from 2007 support. Taken together, the odds strongly favor a downturn in this industrial metal, starting sometime in the next few weeks. The downside target lies at the 50-day moving average, which is currently rising from $176.


Freeport-McMoRan (FCX) -- Daily
chart
eSignal

Price action in commodity-based equities tells a similar tale. Freeport-McMoRan ( FCX), a long-side pick since Feb. 12 in my TSC newsletter, The Daily Swing Trade, is now trading just 3 points under its 200-day moving average. This positioning could mark the end of a journey that began at December's bear-market low.

A vertical rally into 200-day moving-average resistance, after a financial instrument pulls sharply lower, is not characteristic of an emerging bull market. Rather, it's a mean reversion event, in which price pulls toward the center following a normalization of supply and demand. Momentum usually dissipates quickly after that spring-loaded goal is achieved.

Taking this dynamic one step further, the broad market could enter a long consolidation phase as soon as the majority of its components complete their mean reversion swings. In turn, this would favor a trading range that eats up volatility and lets the world economy catch up with the current high expectations.

That pattern might also correspond with the long-awaited decline in the CBOE Volatility Index (VIX), which is doing its best to roll over and sell off into the low 20s. It would also mark a generally unfavorable period for shareholders trying to play catch-up after last year's crash.

Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.


Know what you own: Farley mentions the KBW Bank Index. Key components include Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), U.S. Bancorp (USB) and State Street (STT).

At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.

Alan Farley is a private trader and publisher of Hard Right Edge, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of The Daily Swing Trade, a premium product that outlines his charts and analysis. Farley has also been featured in Barron's, SmartMoney, Tech Week, Active Trader, MoneyCentral, Technical Investor, Bridge Trader and Online Investor. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

Farley appreciates your feedback; click here to send him an email. Also, click here to sign up for Farley's premium subscription product, The Daily Swing Trade, brought to you exclusively by TheStreet.com.

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