Stocks Continue to Exhibit Topping Behavior

| April 30, 2010

The S&P 500 index closed sharply lower today, returning to support at the lower boundary of the extremely overextended short-term uptrend from early February. The index has now been exhibiting signs of distribution since average daily volume increased meaningfully three weeks ago, and the intraday chart over that time period is a prototypical example of topping behavior.

Notice how the index surged higher four times, only to move sharply lower immediately following each advance as subsequent selling pressure overwhelmed the buyers. The fact that this price action has been accompanied by above average volume is further evidence that the uptrend is weakening. As always, it is important to keep in mind that a top is a process, not an event, so stocks can certainly move up to another marginal new high. However, this behavior has substantially increased the likelihood that a top is now in the process of forming. A confirmed break below uptrend support near current levels and subsequent move down to congestion support in the 1,167 area would further increase the odds of the correction scenario.

Category: Commentary, Market Update

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