News Analysis date published New: 
Wednesday, January 30, 2013 - 06:00
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Wednesday, January 30, 2013 - 06:00
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Wednesday, January 30, 2013 - 06:00

DULMF Stock Crowded With Sellers

Wednesday, January 30, 2013 6:00 AM

Stocks were generally higher last week, with the notable exception of Apple (Nasdaq: AAPL). Traders often expect a pullback or a consolidation after a big gain like we've seen in the past few weeks. The big question is whether that will be a reversal or a pause in a strong uptrend.

S&P 500 Moves Up Without Apple
Apple opened last week as the largest company in the world when measured by stock market capitalization. After a 12% drop, Apple had ceded the top spot to Exxon Mobil (NYSE: XOM). Apple accounts for more than 3.5% of the S&P 500 index, which makes the gain in that index noteworthy. It was broad-based strength that pushed SPDR S&P 500 (NYSE: SPY) to a 1.29% gain for the week.

PowerShares QQQ (Nasdaq: QQQ), an ETF that tracks the 100 largest Nasdaq stocks, couldn't overcome the drag from Apple, which makes up 13.5% of the index. QQQ lost 0.1% for the week.

As we can see below, the two indexes have very different charts.

SPY has continued building on the strength seen the first trading day of the year. QQQ closed on Friday below its January opening price, but most of that weakness can be attributed to Apple.

According to StockCharts.com, 80% of the Nasdaq 100 stocks are in short-term uptrends. More than 81% of the S&P 500 stocks and 76% of all NYSE stocks (shown on the chart below) are on buy signals. This is a level where market gains tend to slow down.

The percent of stocks on a buy signal can't be used to precisely time market tops or bottoms. But with so many stocks being bullish it does mean that large gains are unlikely to occur quickly simply because so many stocks are already participating in the bull market. In the past, when this many stocks are "buys," we tend to see major market averages drift higher.

Odds favor a consolidation, followed by more gains. Of course, a sharp break in the stock market can never be ruled out, but it is looking increasingly unlikely. The safest course of action in the week ahead is to wait for a breakout, which is very close to occurring on the upside, before entering a new trade.

Action to Take --> Buy SPY at $151 or above. Short SPY at $144.50 or below. Place initial stop-loss 5% away from the entry price if either order is filled.

Gold Sells Off Despite Good News
SPDR Gold Trust (NYSE: GLD)
fell 1.5% last week. Gold bugs have every reason to be bullish in the long term with news out of Japan indicating that the Bank of Japan (BOJ) intends to push inflation up to about 2%. Time will tell if the BOJ can reverse almost two decades of deflationary pressures by printing money, but the fact that another major central bank is in favor of increasing inflation should support higher gold prices.

However, in the short term, sellers seem to outnumber buyers in gold right now and the price is falling. The monthly chart shows now is not the best time to buy gold.

GLD is below its 10-month moving average (MA), a signal that it could be starting a bear market. The stochastics indicator has developed a sharp bearish divergence since GLD topped in the summer of 2011 and completed a bearish crossover at the end of December. With the MA now confirming that signal, traders should consider taking short positions in gold.

PowerShares DB Gold Short ETN (NYSE: DGZ), an inverse fund that gains when gold prices fall, was up 1.53% last week. This ETN is still a buy.

Action to Take --> Buy DGZ up to $12.25. Maintain stop-loss at $11.25. Maintain price target at $14.

This article originally appeared on ProfitableTrading.com:
Market Outlook: 'Sell' Signal in Gold Indicating a Bear Market Could be Starting

[Note: My colleague Amber Hestla of ProfitableTrading.com has put the finishing touches on a report that answers ten commonly-asked questions about boosting income with options. If you'd like learn more about generating income using options, simply click here and tell us where to send the report.]

Michael J. Carr does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.