Significant negative techincals signal pending correction

I pay a lot of attention to technical analysis.  I also pay equal attention to fundamental things as well.  Both technical and fundamental factors give me great pause.  On the technical side, we have seen the major indexes once again climb to similar levels that we witnessed at the previous peak in early April, just before an 11% correction.  Stocks are currently struggling to surpass those highs, and if they fail to do so, this will be a major negative.  Also, the Dow has approach the 13,317 level several times (this is the 4th), and each time it has failed to drive through that level to new highs.  Each failure adds more resistance for the index at that level, making it that much tougher and unlikely that the index will successfully surpass that level, at least in the short-term.

Today (Friday before Labor Day weekend) will be a big test for the equities markets.  We opened higher on optimism over Bernanke’s speech in Jackson Hole, in which he reiterated his stance that QE 3 is at least a possibility.  Market participants took that as a positive, at least initially, and drove stocks higher.  However, we are well off of the highs of today’s session.  If we close flat or down, this will lend more weight to the technical storm that is building.  Long weekends are traditionally times when short-term traders take their money off the table, because they don’t want to risk something major happening over the weekend that can cause heavy losses when the markets reopen.

Another concerning technical indicator is the weakening of the VIX – the volatility index.  Typically when the stock market is rallying, but the VIX is weakening, it means that their is little conviction in the rally.  Volume has been light, which is usual for this time of year when many are on vacation with their kids just before school starts back up.

The real test will be over September and especially October, two months that historically have seen major corrections/crashes, going all the way back to the October 29, 1929 crash that signaled the start of the Great Depression.  While I am not looking for a crash necessarily, the technical aspects of the market certainly do not give me a lot of confidence that stocks are poised for continued gains.  I raised a large amount of cash recently, and plan to hold that cash until stocks move back down to more reasonable levels and until the technicals look much more attractive.  Caution, especially with the elections looming in November, seems the wise play here.

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