Yesterday's action was enough to turn another important indicator of ours to the "bearish" side as the NASDAQ Composite Bullish Percent ($BPCOMPQ) has followed the NASDAQ-100 Bullish Percent ($BPNDX) into "bear confirmed" status.
In mid-December we alerted traders that the NASDAQ-100 was "overbought" above the 70% bullish level and that stops should be move up under bullish trades. Not long after, the move volatile and quick moving NASDAQ-100 bullish percent turned "bear confirmed." Over the years, that has been a signal that internal weakening was being found as more stocks began giving sell signals on their point and figure charts.
Well, it now comes as little surprise that the NASDAQ Composite Bullish Percent is flashing the warning signals of internal weakness as this indicator has turned "bear confirmed." As we line up the bullish percent charts, a bull would have to be in denial that things are looking very similar to what we saw last summer.
NASDAQ-100 and NASDAQ-Composite Bullish % Correlation
We've been cautioning tech bulls and traders/investors in 4- lettered stocks to be tightening up stops or writing some covered calls on positions and now the defensive play calling should be in full swing as the NASDAQ Composite (a much broader market indicator) has turned "bear confirmed."
Yes, the recent economic data has been more favorable for an economic recovery, but that doesn't mean that the MARKET may still feel that valuations are a little high and that stocks may have gotten ahead of themselves.
As you can see, just because we've seen these indicators turn more bearish, that doesn't mean we won't see some type of bullish phase in the future. I've lost count of the number of times we've gotten some very good bullish phases for those retirement account traders to trade.
For now, more defensive strategies should be in place. Traders that only trade bullish should now be in a sit and wait mode. One thing that will be important to monitor in the coming weeks is a stocks relative strength. Under current market conditions, the "odds" of buying a stock and seeing its price rise is against the bullish trader. However, a stock that declines just 5% versus a broader market that may decline 7% is actually showing good relative strength. When bullishness returns to the broader market, those stocks with good relative strength will most likely be the best performing stocks for the next move higher.
We'll be talking about some stocks in coming weeks that are showing good relative strength and looking for entry points. What we want to see is some type of bullishness return to our bullish percent charts that will tell us of some internal strength starting to develop.
For now, its time to get more aggressive with the defensive strategies.