Back in May we took a look at market leaders for any clues on market direction. At the time they were in lockstep with the markets, and this trend has continued to an extent, as the markets continue to show weakness. It is important for traders to keep watching market leaders, as they will often begin to diverge from the general markets at turning points. Traders need to be leery of the markets as long as its leaders are also performing poorly. Once market leaders begin to catch a bid, it will likely translate to strength in the overall markets.
Despite the lateral price movement for months, Apple, Inc. (Nasdaq:AAPL) is still one of the most important stocks to monitor. This stock has led the way for a long time and has staved off a deeper correction after a few attempts to break under $328-$330. AAPL has actually started to diverge positively from the markets, as it has held above its April lows even while the general markets probe new lows. However, it also remains in a lateral range and is no where near challenging for a breakout. Traders should continue to keep an eye on it though, as its next move is likely to be followed by the markets. (For related reading, check out Trading Failed Breaks.)
Amazon.com, Inc. (Nasdaq:AMZN ) is another stock that has been a leader since the markets bottomed a couple of years ago. AMZN actually had a strong breakout in late April and had been consolidating as the markets pulled back. However, more recently it has come under continued pressure and has ended up giving back all of its breakout gains. It is also trading back in its prior base and under its 50-day moving average. While it is still in a decent technical position, especially when compared to the indexes, there is no denying that the recent price action has been weak. Traders should watch to see if AMZN can climb back above the breakout area near $192.
Google Inc. (Nasdaq:GOOG) has continued to perform poorly and is in the worst position of former market leaders. One can argue that GOOG is no longer a leader in the stock market, despite its lofty status as a tech company. GOOG gapped down in April on high volume and has yet to seriously attempt to fill the gap. Worse, it has remained under most of the gap day's closing price for weeks. GOOG certainly has been weak and continues to move in lockstep with the markets, if not worse. (For more, see Yandex and LinkedIn The Next Google?)
While Chinese search company, Baidu, Inc. (Nasdaq:BIDU) has been outperforming GOOG and acting as a market leader, it has also succumbed to selling pressure. Many Chinese stocks have suffered over the past few weeks as another rash of accusations of fraud have surfaced. While BIDU has not been linked to any of these stories, it has certainly performed poorly over the past few weeks. After a surge to above $150, BIDU has reversed to near $120 per share. The past few days have been particularly weak, seeing BIDU shed almost 20 of those points. BIDU does remain above its prior base from 2010, but could be headed towards the $115 area for a test of that breakout level. (For more, see Shoot The Moon ... And Hit It!)
Currently, nothing in the price action of these market leaders is revealing a bottom to the recent pullback. Some other leaders like Netflix, Inc. (Nasdaq:NFLX) have maintained their strength, but in general, most leaders are suffering along with the markets. The markets are oversold and are likely due for a near-term bounce, but the correction is likely to continue until the market leaders begin to diverge and show strength. Until then, traders should assume any bounce as simply that. The markets will not be able to sustain any type of strength without participation from its leaders.
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At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.