Correction Time This Week? Stock Market Technicals Are Deteriorating

NEW YORK (TheStreet) -- A stock market decline this week could result in negative weekly chart profiles for each of the five major equity averages, which would indicate a risk of that long-awaited technical correction.

The Dow Jones Transportation Average (DJT) is already in correction territory, down 11% from its all-time intraday high set at the end of November. The Dow Jones Industrial Average (DIA) and Russell 2000 (IWM) do not have to decline by much this week to have negative weekly closes on Friday. The S&P 500 (SPY) and Nasdaq (QQQ) are the two most likely to prevent a negative technical signal for the stock market.

Here are the updated profiles for the five major averages.

Dow Industrials had a close of 18,010.68 in May, up just 1.1% year to date and 1.9% below its all-time intraday high of 18,351.36, set on May 19. The close was just below its 50-day simple moving average of 18,019, with its 200-day simple moving average down at 17,578. This average was last tested at 17,066 on Feb. 2.

The weekly chart will shift to negative from neutral if the index closes this Friday below its key weekly moving average of 18,067 if the weekly momentum reading, now at 80.07, declines below the overbought threshold of 80.00. The downside risk on a negative weekly signal is to the 200-week simple moving average of 14,884. This average was last tested during the week of Oct. 7, 2011, when the average was 10,650.

The S&P 500 had a close of 2,107.39 in May, up 2.4% year to date and 1.3% below its all-time intraday high of 2,134.72 set on May 20. The close is above its 50-day simple moving average of 2,099.1, and well above its 200-day simple moving average of 2,041.7. This average was last crossed on Oct. 21, when the average was 1,907.0.

The weekly chart is positive but overbought, but the index is just above its key weekly moving average of 2,106.3. A negative weekly chart would require a close this Friday, June 5, low enough to push the weekly momentum below 80.00 from this week's reading of 86.51. The downside risk on a negative weekly signal is to the 200-week simple moving average of 1,650.3. This average was last tested during the week of Oct. 7, 2011, when the average was 1,142.8.

The Nasdaq had a close of 5,070.03 in May, up 7.1% year to date and just 1% below its multiyear intraday high of 5,119.83, set on April 27. This index is well above its 50-day and 200-day simple moving averages of 4,996 and 4,742, respectively. This average was last crossed on Oct. 20, when the average was 4,303.

Many in the financial media were touting that the Nasdaq set an all-time closing high of 5,106.59 on May 27, but closing highs are outdated market metrics. The use of closing highs go back to the old days before automated charts were available on computer screens. For the last 30 years or so, technicians form trend lines by connecting intraday highs or intraday lows. Trends drawn through closes are worthless to market technicians. However, closes remain important inputs for calculating moving averages and momentum readings.

For the Nasdaq, the all-time intraday high of 5,132.52 was set in March 2000, so the Nasdaq has not yet set a new all-time high in 2015. The March 2000 close for the Nasdaq was 4,572.83 -- as the tech-bubble began deflating.

The weekly chart for the Nasdaq is positive, with the composite above its key weekly moving average of 5,018; the weekly momentum reading of 78.31 is up from 76.07 on May 22. A negative weekly chart would require a close this Friday, June 5 low enough to push the weekly momentum below 78.31. The downside risk on a negative weekly signal is to the 200-week simple moving average of 3,651. This average was last tested during the week of Sept. 10, 2010, when the average was 2,219.

Dow Transports had a close of 8,300 in May, down 9.2% year to date and 11% below its all-time intraday high of 9,310.33, set on Nov. 28. This index is well below the moving average "death cross," with the 50-day simple moving average of 8,697 trending below the 200-day simple moving average of 8,748.

The weekly chart is negative, with transports below its key weekly moving average of 8,633 and with the momentum reading down to 22.62 from 28.90 on May 22.

The Russell 2000 had a close of 1,246.53 in May, up 3.5% year to date and 2.5% below its all-time intraday high of 1,278.63, set on April 15. This index is below its 50-day simple moving average of 1,250.75 and above its 200-day simple moving average off 1,190.34.

The weekly chart is neutral, with the index just above its key weekly moving average of 1,244.56, but with momentum declining to 59.21 from 60.24 on May 22. A negative weekly chart would require a close this Friday, June 5, below 1,244.56. Given a negative weekly chart the downside risk is to the 200-week simple moving average of 984.64. This average was last tested during the week of Oct. 7, 2011, when the average was 652.39.

To summarize, the technicals for the stock market shift to negative given simultaneous weekly closes on June 5 below the key weekly moving averages of 18,067 for the Dow Industrials, 2,106.3 for the S&P 500, 5,018 for the Nasdaq, 8,633 for the Dow Transports and 1,244.5 for the Russel 2000, with all five momentum readings declining from the levels of May 29.

Here's the charts for three related exchange-traded funds, starting with the SPDR Dow Jones Industrial Average ETF (DIA).

Courtesy of MetaStock Xenith

The weekly chart for the Dow 30 ETF, which had a close of $180.11 on Friday, is neutral, with the ETF below its key weekly moving average of $180.52, but with momentum in overbought territory at 80.76. A close this week on June 5 below $180.52 with momentum declining below 80.00 would be negative.

Investors should consider booking profits using a good till canceled limit order to sell the ETF if it rises to $181.58, which is a key level on technical charts until the end of June. A daily close below a key level of $179.33 should be considered a warning that profit taking is the correct investment strategy now.

Here's the chart for the SPDR S&P 500 ETF (SPY).


Courtesy of MetaStock Xenith

The weekly chart for the S&P 500 ETF, which had a close of $211.14 on Friday, is positive but overbought, with the ETF just above its key weekly moving average of $210.75, with momentum in overbought territory at 86.83. A close this week on June 5 below $210.75 with momentum declining below 80.00 would be negative.

Investors should consider booking profits using a good till canceled limit order to sell the ETF if it rises to $215.78, which is a key level on technical charts for this week only. A daily close below a key level of $209.26 should be considered a warning that profit taking is the correct investment strategy now.

Here's the chart for the PowerShares QQQ Trust ETF (QQQ).


Courtesy of MetaStock Xenith

The weekly chart for the Nasdaq 100, which had a close of $110.05 on Friday, is positive but overbought, with the ETF above its key weekly moving average of $108.86, with momentum in overbought territory at 86.83. A close this week on June 5 below $108.86 with momentum declining below 0.00 would be negative.

Investors should consider booking profits using a good till canceled limit order to sell the ETF if it rises to $111.74, which is a key level on technical charts for this week only. A daily close below a key level of $109.07 should be considered a warning that profit taking is the correct investment strategy now.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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