We’ve discussed the strength of the overall U.S. stock market numerous times as supported by the very positive internal statistics.  Advancing versus declines, new highs versus new lows, numbers of stocks in the positive bullish percent column, all have been  supportive of the strong advance since mid November.  The lack of volatility is the real surprise here as the markets have hardly seen any down days of consequence.  The VIX statistic has not budged past the low ‘teens, which indicates little fear in the markets creating an almost eerie complacency.

However benign this is, we know that some profit taking will set in, even if it doesn’t threaten the overall trend. Most indicators are lagging indicators meaning that they generally only give a legitimate signal after the price print of the asset.  Divergences can warn of impending momentum swing, but as we know, divergences can go on for long periods of time without a tradable benefit.

The one type of clue that can be very useful at major or minor inflection points in markets are simple bar charts, or more precisely price candles.  At extremes, we can see exhaustion in the type of candle formed by the price action on any given time frame.   Specifically, when prices open and move higher in the day but come down to close more or less unchanged, we know that buyers are reluctant to push prices any higher and may be a sign of exhaustion. Earlier, we discussed the action on TSLA as an example; price action there appears to be telling us that present price levels are a barrier of some sort.  Thus far at least, the price indeed has in fact come off from the signal candle.

If we look at the price action of the daily price candle on the Dow Jones average today and compare it to the price bars on the S&P and the Nasdaq index, some warning signs are appearing that may lead to a larger price move down.

Here is the S&P

and finally the Nasdaq Composite

In all of the charts, we’ve marked those areas with our famous purple ellipses where hesitation candles, or dojis, appear after lengthy price moves.  Again, we reiterate that these are areas of indecision and depending on whatever market forces prevail, these bars can signal tops or at the very least a pause in the trend.

None of the momentum statistics yet show any significant weakness, but that may follow if the doji bars are confirmed with a few follow on days of selling.  We won’t know if it’s meaningful until price action reveals the outcome. If the indices do pull back, barring catastrophic collapse of internals, the strategy is to stalk those issues that continue to have positive charts like the ones we’ve been mentioning.  Even strong markets need to breathe out.