Stock Market Price Action Exhibits Early Signs of Distribution

| January 10, 2011

We have been closely monitoring the overextended rally in stocks from early September for the start of a potentially violent correction, and market behavior during the first week of 2011 has exhibited some early signs of weakness. Three of the past five sessions on the S&P 500 index daily chart have formed “hanging man” candlesticks, which signal distribution when they appear in a mature rally.

The distribution sessions have occurred on above average volume, which is further evidence of developing weakness. As always, it is important to note that a reversal is a process, not an event, so these developments do not suggest that a reversal is imminent, merely that it is becoming more likely. The first sign of meaningful technical weakness would be a break below support at the lower boundary of the uptrend from September at 1,247 on the S&P 500. On the other hand, a close well above the recent long-term high near 1,277 would reconfirm the uptrend and forecast additional gains. In any event, the next correction will likely begin sometime during the next four weeks, so now is the time to pay close attention.

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Category: Commentary, Market Update

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