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A Tried Market Pauses . . . For Now August 24, 2012

Posted by Tom in Thoughts.
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It felt like this week was a bad week for the markets, and actually compared to previous weeks it was, but only modestly down.  Let’s take a look at the NASDAQ Composite Index chart:

We’ve had an exceptional run up since June and it’s very reasonable to expect a pause with a minor correction along in here.  Looking at the channel that I’ve drawn we note that prices are right at the upper edge of that channel.  Dropping down to the lower edge would not be unexpected, but sure would scare the heck out of folks.  The red line above the price chart indicates price momentum.  Yes it has slowed and taken a dip, but not by much.  What also is interesting is the gradually decreasing volume (lower chart).  This indicates (to me) that there is not wholesale selling, but more likely a lack of buying that is causing prices to edge lower.

Can this be a buying opportunity?  Perhaps, we’ll need to see some additional signs of strength in order to buy and there is always a possible sign of weakness (perhaps on poor news out of Europe?) to tip the scales into serious selling.  So we wait a keep our Watchlist of strong candidates up to date.  There are select areas that are showing strength before the softness and are currently holding up well.  Select Tech and SemiConductor stocks as well as some Consumer discretionary stocks.  Oil and Oil Services have done well and may continue higher.

Overall here’s a picture of stock price health in the broad S&P 1500 Index:

Note that last week the “greens” were about 50% of the total, but have fallen back, while the “yellows” are now about 50% of the total.  Yes we are seeing weakness of stock prices in the broad market but so far no red flags flying.  I’ve taken some money “off the table” and have used this opportunity to cull stocks that have been under performing.  I’ve added minor positions in strong stocks, but not many; I prefer to wait for that SOS (sign of strength), or not.  A strong position in Cash looks fine to me right now.

Feel free to post comments (at the top of this post); enlarge chart by clicking on them.  Have a great week.    …… Tom …….

chart courtesy of MetaStock; pie chart by www.HighGrowthStock.com; used with permission (of course).

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