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Charts say market headed lower. What to sell

Brendan McDermid | Reuters

Technical analysts, those who study charts to make buying and selling decisions, believe a bigger pullback could begin this week.

Among the patterns worrying the analysts are a series of "lower highs" by the S&P 500, the underperformance of key sectors such as biotech and transports, and the outperformance by bonds.

"Tactically we see downside risk on SPX to the 200 DMA (daily moving average) at 2,013. While there is near-term support at 2,040, given the lack of short-term oversold conditions and Friday's negative reaction in the futures, we think 2,040 is unlikely to hold," wrote Jonathan Krinsky, chief market technician at MKM Partners, in a note to clients Sunday.

S&P 500 3 months

Source: FactSet

Some key trends that have kept the bull market afloat since the start of 2014 are starting to change:

  • The iShares Nasdaq Biotechnology ETF, a measure of the risk appetite of investors, is down more than 3 percent in one week. The sector is up 50 percent over the last 12 months.
  • An ETF that tracks the dollar index, a measure of the greenback versus a basket of major currencies, is off almost 1 percent this month after a 19 percent surge over the last 12 months.
  • The iShares Transportation Average ETF, a key measure on the health of the economy, is off 2 percent in one week following a 14 percent increase in the last one year.

(Values are as of Friday's close.)

Stated Krinsky:

"There have been some rather large counter-trend moves taking place over the last two weeks. Perhaps it was the 'Ides of March', but strong bull markets like the U.S. Dollar and biotech began to pull back in mid-March, while bear markets such as Russia, Brazil and crude oil have rallied sharply. Of course nobody knows for sure if these are the start of bigger moves, but for now we are giving them some respect."

Sam Stovall, U.S. equity strategist for S&P Capital IQ, points out a key area of support for the S&P 500 that it must hold this week amid the selling.

S&P 500, 6 months

Source: FactSet

Wrote Stovall in a note to clients last week:

"From a technical perspective, the S&P 500 continues to trade into and bounce off of critical support around 2,034-55. The most recent bounce was smaller than the prior bounce, however, which leaves a lower high in place and puts the pressure on the bulls to step up and defend this support zone. ... This defines the current position of the markets and the resolution of the S&P 500 is likely to be the deciding factor on whether we continue to the upside or break downward. We think the index is set up for acceleration to the downside, should it breach the 2,036-34 zone."

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Meanwhile, the iShares 20+ Year Treasury Bond ETF (TLT), a good barometer of interest in Treasurys, is up almost 6 percent in one month, while the S&P 500 is little changed over the same period. One thing we learned during this bull market, and pointed out by Brean Capital in the chart below, is that stocks and bonds can't both go up. (Highlighted in red is when bonds are outperforming stocks.)

S&P 500 vs bonds

"TLT is winning the momentum of comparative strength battle versus SPY (a key S&P 500 ETF). This tends to mean a less favorable backdrop for equities," wrote Frank Longman, chart analyst for Brean.

Money play:

MKM's Krinsky screened the whole market for stocks breaking down on a chart basis.

Out of 3,000 stocks, MKM found 100 that should be sold based on their prices trading below their moving averages and failing to hit new 52-week highs with the rest of the market.

Among the names that made the list were Gilead Sciences, Baxter, Google, Qualcomm and Philip Morris.

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