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4 Sector Charts Warn of Price Weakness

Last week’s rally produced a series of lower highs in these important groups


Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter here.

With Tuesday’s Cinderella bounce in stocks, by end of day, the bullish broker calls started warming up my phone again. Twitter, however, remained quiet as the truer tape sensed more downside to come for stocks (follow me on Twitter @SteadyTrader).

On Wednesday, by the time I finished my morning sweat and flipped on all six of my screens, red covered most of the cross asset space with a notable breakdown in European large-cap stock indices.

DAX Chart
Click to Enlarge

They say a picture speaks a thousand words, and with that in mind, please take a quick glance at the chart of Germany’s DAX 30 large-cap index — nicht gut! The index snapped a key medium-term support line that should now let it sail another 3% or so lower before better support is reached.

SPX Chart

State-side it didn’t take long after the opening bell for sellers to dominate, and by midday, the S&P 500 had come within 5 points of my key line in the sand at 1,538. My intraday low target that I discussed in yesterday’s column was 1,542, and we got within 1.5 points or so of that level before bouncing higher.

I will reiterate that unless the S&P 500 can snap 1,538, the recent price pressure is better labeled a consolidation phase rather than a correction. Below 1,538, however, I am targeting the 1,485-1,500 area.

Elsewhere in the equities landscape, last week’s rally notably produced a series of lower highs in important groups — transports, housing, semiconductors and small caps, among others — that could not muster up enough courage to frolic to new 2013 highs.

IYT Chart
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The transports, as represented by the iShares Dow Jones Transportation Average (NYSE:IYT), put in a lower high last week before giving way to price weakness this week. IYT now sits on a key neckline that may belong to the head-and-shoulders formation you see.

SOX Chart
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The PHLX Semiconductor Index (SOX) looks much the same — a lower high last week led to lower prices this week, and yet another retest of neckline support.

HGX Chart
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Housing-related stocks, as represented by the PHLX Housing Sector Index (HGX), are also in a tricky spot. Last week’s lower high may just have been the trigger to push this one below its key support line.

IWM Chart
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Last, but by no means least, is the small-cap Russell 2000. Last week, the iShares Russell 2000 Index (NYSE:IWM) flagged a lower high versus the March highs, and this week, so far has shown nothing but weakness. Any break below this neckline and the index should have enough momentum to slip toward $86, or 860 on the Russell 2000.

In full disclosure, because that’s how I roll and because full transparency is the way forward, I remain short IWM for a swing trade.

All in all, as I mused yesterday, unless corporations can serve up some seriously positive earnings and outlooks, stocks look to have gained enough momentum for another few percentage points lower on the major indices.

For more insight into the current market conditions, check out my video analysis below:

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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