Buying Climaxes Soar to ‘Flash Crash’ High as 30% of S&P 500 Stocks Peak

Buying climaxes are at the highest level since April 2010. The April 2010 highs were closely followed by the May ‘Flash Crash.’ Are the current conditions similar to 2010 and should we be concerned about a ‘Flash Crash-like’ event?

There were 864 stock buying climaxes last week. What is a buying climax and why is that significant?

Buying climaxes happen when a stock (or index) makes a 12-month high, but closes the week with a loss. They are a sign of distribution and indicate that stocks are moving from strong hands to weak ones.

iSPYETF previously pointed out elevated buying climaxes in articles published on February 13 (112 buying climaxes) and April 10 (347 buying climaxes).

Both instances were followed almost immediately by corrections (see chart). Last week’s number of buying climaxes – 864 – eclipses the 112 and 347 climaxes seen prior to the February and April corrections.

In fact, the current reading is the second highest total since 2004 and is surpassed only by the 1,079 buying climaxes in the week of April 30, 2010 (see chart insert).

It sounds dramatic, but it’s worth pointing out that the April 2010 price high was chased by the May ‘Flash Crash.’

Does that mean another ‘Flash Crash’ event is around the corner?

The ‘Flash Crash’ was preceded by historic sentiment extremes and an incredibly concerning equity put/call ratio. In an April 16, 2010 note to subscribers (now known as Profit Radar Report) I warned that:

The equity put/call ratio is 45% below its six-month average. The message conveyed by the composite bullishness is unmistakably bearish. Once prices do fall and investors do get afraid of incurring losses, the only option is to sell. Selling results in more selling. This negative feedback loop usually results in rapidly falling prices.”

Current conditions aren’t as extreme as they were in April 2010, but they should be of concern to investors, nonetheless.

It doesn’t take a ‘Flash Crash’ to hurt a portfolio. A slow and determined correction can do the same thing ‘Chinese drip torture-style,’ – slower, more painful, but with similar results.

Like in 2010, it will take a ‘watershed’ event, a decline that spooks enough investors, to get the ball rolling.

A break below important support will likely be just such an event. The Profit Radar Report already pinpointed the must hold support level that – once broken – will lead to lower prices.

Weekly ETF SPY: XLV – Head-and Shoulders Above Other Sectors

The Health Care Select Sector SPDR ETF (XLV) sports the second best year-to-date performance. Recent price action has exposed a key short-term support level that can be used as a trigger level for investors looking to short the health care sector.

The Health Care Select Sector SPDR’s (XLV) performance ranks head-and shoulders above the rest. XLV is up 19.19% year-to-date, outperformed only by utilities (XLU is up 19.66%).

Other double-digit year-to-date performers include the Consumer Staples Select Sector SPDR (XLP – 17.89%), Consumer Discretionary Select Sector SPDR (XLY – 15.46%), Financial Select Sector SPDR (XLF – 14,48%) and Energy Select Sector SPDR (XLE – 10.08%).

Technology (XLK), industrials (XLI) and materials (XLB) are stuck in single digit performance territory.

Looking at the performance (and possible cracks) of leading sectors often provides clues for the overall stock market. Prior ETF SPY’s identified key support for other leading sector ETFs like the iShares Russell 2000 ETF (IWM) and SPDR Retail ETF (XRT).

Key support for IWM and XRT has proven crucial to the short-term performance of IWM and XRT. Bot sectors/ETFs bounced exactly from support.

Not all technical analysis proves correct with that much clinical precision, but XLV is at a point where key support has become visible.

The chart below shows that XLV may be carving out a short-term head-and shoulders pattern with a neckline around 46.70. This week this potential neckline coincides with trend line support.

A break below 46.70 would unlock a measured target of 45.15 +/-, which also coincides with trend line support.

As long as support holds, the up trend remains intact and we’re just talking about ‘unhatched eggs.’ Investors fishing for a price top may use broken support as a trigger level for short positions.

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Dow – Record Winning Streaks Rarely Lead to Lasting Tops

The Dow Jones just extended its run to the longest rally in over 16 years. Common sense would suggest that ‘what goes up must come down,’ but prior instances of prolonged and overextended rallies paint a different technical picture.

If you like superlatives, 2013 is your year. After edging out another gain on Wednesday, the Dow Jones closed higher for the 9th consecutive trading day. This is the longest such streak since November 1996.

Now, stocks are overbought, volume is waning and RSI is lagging. How Bearish is this for the stock market? How have stocks done after previous 9-day winning streaks?

The sample size for 9 consecutive up closes is extremely small. There’s only one since 1996.

To get a larger sample size and better read, we’ll look at recent times the Dow closed higher for 7 or 8 days in a row.

The chart below highlights all 7-and 8 consecutive day up closes since the 2009 low.

There are two 7-day streaks (July 2009, March 2007) and three 8-day streaks (August 2009, March 2010, February 2011) and of course this year’s 9-day streak (March 2013).

Every 7-or 8-day run was followed by at least one more short-term high within the next two trading days (twice the very next day, followed by marginally lower prices).

In July 2009 and February 2011 the Dow just kept trucking higher. In August 2009 and March 2012 the Dow corrected approximately 4% within days after the streak ended.

Somewhat bigger corrections (up to 10%) were seen about a month after the February 2011 and March 2012 streak highs. All losses were eventually recovered.

It is interesting to note that 3 of the 6 runs occurred in March and (one more happened in February), so March momentum runs are nothing unusual.

The gray/black trend lines in the above chart show important resistance levels, that once broken led the extended rallies (resistance levels were outlined in the Profit Radar Report).

To sum up, the Dow is ripe for a correction, but any correction is likely to draw in enough buyers to bid up prices to new all-time highs.

Since history doesn’t always repeat itself, it’s important to watch key support levels and become defensive if they are broken.