Stock Market Another Red Flag...

By: Jack_Steiman

The fun stuff is going to end at some point folks. These negative divergences on the big leaders is going to kick in big time some day. Now? Months from now? My guess is, not yet, but we are seeing signs.

Look at the chart of Apple Inc. (AAPL) tonight. Look at that bearish engulfing stick today off of yesterday's gap up. Look at that massive negative divergence. One after the other on each new high. Same can be said for all the big cap leaders.

One after the other on each new high.

Like clock work. Set your timer to it. New high price, lower high MACD. The market is getting more and more dangerous. This doesn't mean we won't see new highs. Not one bit. Probably will. Just start grasping on to this reality, every new buy is dangerous but you can't short yet because we have not taken out any significant support levels and have not had that reversal bar that says enough froth is enough froth.

With 1018 gap and the 1010 70-week moving average support under current price, you just can't say now I'm just going to short aggressively, or even at all. You have to play the long sideuntil we get a signal change. Simple as that. Every time it looks like it's finally upon us, it isn't.

However, the reversals again today off another negative divergence on the daily charts on stocks like Apple Inc. (AAPL) tell us to keep things light. NO full portfolios. NO long term portfolios. We probably go higher still, but the trouble signs are increasing one by one. And it's not just AAPL or other leading stocks, in some cases it's leading sectors.

Look at the chart of the Financial Select Sector SPDR (XLF) or the financial ETF. What a horrific MACD and negative divergence on that daily chart. Does it mean it can't grind higher? Not at all. It can. However, hold your breath if you're buying it and pray real hard. The buy weakness mentality is still out there in full force. Some day it won't matter. Just recognize that there are increasing risks and dangers out there. AAPL and the XLF tell me that the risks are definitely increasing in a big way. Let's hope the market decides to hang in there a while longer for those too aggressively long but you never know. I do think they will but you get the idea. Easy does it.

We started higher yet again today, right in to the teeth of overbought, as the economy received good news on housing. Applications increased 17% thus the futures reversed quite nicely out of the red and in to the green. We jumped up a bit at the open and watched the bulls move things higher as the day wore on. Little fight from the bears as usual.

Then we saw what I wrote about above. The big cap leaders such as Research In Motion Limited (RIMM) and Apple Inc. (AAPL) began their rollovers and the markets came down off their highs, although I wouldn't exactly say things fell apart. Pulled back off the top would be the best way to describe things.

There was enough money rotating around to keep the market from falling too hard off the highs for the day thus the reality of not getting too bearish too fast quite yet. That day will come but not yet. Let's see how the market sells or not now that it seems intent on trying to unwind finally from overbought. It can stay overbought and sure seems to want to. A little selling first would be best.

I am getting an enormous number of requests about playing the gold trade. It is a very popular trade. When should I get in? What's the perfect support to buy in to? These are scary questions when it comes from too many people. I'm not saying not to get in. Do so if you feel you must but this is becoming a very crowded trade and makes me nervous.

Being on the same page with the masses always makes me feel like I'm on the wrong side of the trade. The last time it worked for a while was 1999. We know what happened after that. Maybe gold goes to 2000$ an ounce and SPDR Gold Shares (GLD) and all the other gold stocks explode higher. If you feel you should be in the trade, then by all means do so. I can't participate under these conditions. Please be careful and if you do enter, don't be greedy and keep stops tight.

The market remains on an overall buy signal. Risk is increasing but you have to remain on the side of the signal in place. It's not easy and I respect that fully. My best guess is we extend to new highs over S&P 500 1039 soon, but I wouldn't go out and celebrate it. Important support, the most important short term support, is S&P 500 1018 down to 1010. As long as that confluence of support holds, and my guess is it will short term, then we should see new highs of some type before this all comes tumbling down. Please don't overdo it. There is risk and it's increasing. Longs are appropriate but not 100% in.

Peace
Jack Steiman

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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