The Strength of Market Leaders

The strength of any given market can usually be evaluated by the action of its leaders. These market leaders are usually widely held by institutions and their trading activity can provide insight into overall market sentiment. Weakness in this group is often a red flag. History has shown us that the markets will rarely make a sustained move without the cooperation of market leaders.
Most recently the key group that has been leading the market higher has been the large cap technology stocks. Traditionally leadership from this group is healthy, as it shows an appetite for risk-taking in new and emerging technologies from speculators. Here are four of these leaders

Apple (Nasdaq: AAPL) is one company that has been regarded as a market leader over the past few years. AAPL has managed to recover all of its bear market declines and was recently trading at a new all-time high. However, despite the longer term strength, AAPL has been showing signs of weakening recently. It closed under its 50-day moving average in January [RED arrow] and has failed to reclaim it in subsequent trading. It has also transitioned into a lateral trend after a strong rally over the past year. While AAPL hasn’t broken down, it is vulnerable to further weakness. The $190 area appears to be a key level of support and has contained prior pullbacks.

Google (Nasdaq:GOOG) is another stock widely regarded as a market leader. While GOOG has erased much of its bear market declines, it has underperformed AAPL and remains off its all-time highs. It also fell beneath its 50-day moving average in January, as the general markets experienced some weakness through earnings season. GOOG is currently attempting to stabilize near $525 and is also vulnerable to further weakness. If GOOG were to continue falling, the $500 level, which is near the 200-day moving average, could act as the next support level.

Amazon.com, Inc. (Nasdaq:AMZN) is a great example of an innovative company becoming a market leader. Much like AAPL, the company has been leading the current rally and also traded to new all-time highs although it has been suffering through a correction over the past few weeks. AMZN completed a double top earlier this year and is threatening to fill a bullish gap it created last autumn. The $114-$116 area has been defended by the bulls and remains a key level to watch.

International Business Machines (NYSE:IBM) is one stock that isn’t often mentioned when talking about a market leader, but stepping back and looking at the longer term chart it becomes clear that this has been one of the strongest of the large cap stocks. It also recently traded above its prior bull market highs and was only a few points from new all-time highs. But despite the longer term strength, this is another stock suffering through some near-term weakness. It also sliced through its 50-day moving average and is attempting to stabilize near a prior pivot area. The 200-day moving average looms below and could act as a price magnet over the next few weeks.

CONCLUSION:

While the majority of these stocks have not technically broken down, they are all experiencing near-term selling. As market leaders, it will be difficult for the general markets to gain much traction without their participation. Most of these stocks are nearing support levels. However, it’s possible that these levels will fail, leading to the formation of a more serious topping pattern. This would likely lead the markets lower as a deeper correction sets in. It is too early to know what the outcome will be, but these stocks should certainly be monitored closely.