Buyers Beware: S&P 500 Issues Sell Signal

A lower-than-expected ADP employment report and a disappointing manufacturing PMI from the eurozone kept a lid on gains yesterday, despite a handful of better-than-expected earnings from several key stocks.
Banks led the list of decliners with Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM) leading the sector lower. And commodities were hard hit with the CRB Commodity Index off 1.3%, its worst day in three weeks.
The Dow Jones Industrial Average lost 11 points, closing at 13,269, and the S&P 500 fell 4 points at 1,402, but the Nasdaq was up 9 points to close at 3,060. The NYSE traded 780 million shares and the Nasdaq crossed 461 million. Decliners were ahead of advancers on the Big Board by 1.3-to-1, but advancers were ahead of decliners on the Nasdaq by 1.2-to-1.
The stock market continues to struggle, and it is looking more like the major indices have settled into a “range top.” Michael Ashbaugh pointed this out yesterday, as he correctly noted that the overhead for the S&P 500 spans from 1,422 to 1,440, matching the top that triggered a crash in 2008. This doesn’t mean that a crash will occur again from this level, but I believe that it has slowed the advance enough that buyers are not yet ready to venture into that zone.
On Monday, we talked about the “non-confirmation” that exists between the Dow Jones Industrial Average and the Dow Jones Transportation Average — a serious impediment to a breakout. But another non-confirmation existed for several weeks between the S&P 500 and the other very broad-based index, the NYSE Composite. Yesterday, that non-confirmation was resolved.

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The S&P 500 has been sluggish and range-bound; however, until now it had not issued a sell signal. But yesterday, when the 20-day moving average crossed (by a fraction) through the 50-day moving average, a “short-term sell” was confirmed. Also note that the short line (red) of the stochastic is moving lower — not a favorable sign.

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The NYSE Composite issued a sell signal 12 sessions ago when its 20-day moving average sliced through the 50-day. Now its stochastic is close to another sell signal as the index hovers above its 50-day moving average, its first line of support.
Conclusion: These technical sell signals between the NYSE Composite and the S&P 500 have been resolved with the crossing of the moving averages on the S&P 500. Thus far, signals have applied to the short term, but as they accumulate the intermediate zones come under pressure.
Therefore, there is little to be gained by going long at this level, and possibly much to be gained by aggressive short-term selling or just standing aside. Longer-term investors should keep a list of stocks to buy handy, but it could take several weeks or even months if the current patterns aren’t quickly resolved before buy signals are triggered.