One method for keeping tabs on the strength for the stock market is to track the behavior of its leaders. Market leaders are widely held by institutions and their action can reveal the underlying sentiment of these very influential market participants. Weakness in market leaders is often a clear warning that all is not well in the markets. The general markets will rarely make a sustained move without the cooperation of their market leaders and traders can often gain an edge by simply following their behavior.
Amazon.com (Nasdaq:AMZN) has been regarded as a market leader over the past year and a half as it rallied over 100 points from its bear market low in the $30s. It has been in a consolidation since a breakaway gap in November 2009, with solid support near $117 and resistance above in the high $140s. A consolidation following a long rally of several months is normal and actually healthy for a stock. However, AMZN recently broke under its base on high volume. This leaves anyone accumulating stock in this base underwater. The $115 level should be watched moving forward to see if AMZN can reclaim its base.
Google (Nasdaq:GOOG) is another stock that can be classified as a market leader. However, GOOG has been underperforming for several months and is currently setting lower highs and lower lows. This is not healthy price action and there are no signs yet of a turnaround. In fact, GOOG just broke down from a small base to set new lower lows. (For more, see Basics Of Technical Analysis.)
Goldman Sachs Group (NYSE:GS) has been "THE" market leader in the financial sector for years but has struggled since the news of the SEC investigation came out. GS had recovered much of its bear market losses, recovering from under $50 per share to almost $200. Everything seemed to be fine with the stock as it attempted to resume its rally in April until the news came out and GS tumbled sharply. GS broke under its February low a few weeks later and has been struggling under this level since. GS has also fallen into a pattern of lower lows and lower highs and until this trend is reversed, GS traders should remain cautious on the sector.
Apple (Nasdaq:AAPL) is perhaps the best example of how a market leader should be acting through a market correction. Notice how AAPL quickly found buyers on each drop and has basically settled into a consolidation rather than heading lower with the markets. This is healthy behavior and shows support from institutions. While AAPL may not be a screaming buy in this environment, it is important to watch it as a breakdown from AAPL would likely be a huge negative for the markets. The $240 level has held as support recently and this area will be an important level to monitor if the markets continue to deteriorate.
While there is a chance the markets can find support at their current levels, most market leaders are revealing an unhealthy environment. Market leaders should be setting higher highs and higher lows or at worst, trading sideways as the markets correct. But while consolidations are healthy and even market leaders need to take a break once in a while, persistent lower lows and lower highs are not healthy price action and until this trend stops, the markets will likely remain in a highly risky environment.
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At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.