Did the Market Flash Any Warning Signs?

In the video below, I discuss how the market's decline was forecasted by combination of severe distribution in the indexes and poor action among market leading stocks:

Summer Chop

With the S&P falling over 1.8% Monday on increased volume relative to Friday, the market continues to indecisively wander between 1260 and 1355, frustrating and confusing most traders in the process. After an explosive eight-day rally that erased most of May and June's losses, sellers quickly regained control of the market and defended the top end of the summer's trading range. The action lately has been very puzzling, as the bounce off the 200-day moving average that seemed "too cute" actually worked, followed by multiple strong rallies last week that ended at the high of the day, and now an apparent reemergence by the bears. As a further indication of the market's recent mercurial nature, the 50-day moving average on the SPX is now trending lower, while the shorter-term moving averages like the 10 and 20-day continue higher. In choppy markets such as this one, I prefer to mostly sit in cash, as breakouts are more prone to failure and the bulls tend to have difficulty getting any traction. However, if the market can stabilize here and find some solid footing, here are some names I'll be watching on the long side:

ALB has traded within a tight Darvas box between 64 and 71 since May, and volume has dried up nicely in the base. I'd look for a high-volume break of the top of the range to get long.

AZO continues to hover near all-time highs, and has found repeated resistance at 299.50. A break of the psychologically-important 300 level would get me long.

CSII appears to be forming a cup-with-handle base, with the buy point above 15.72. Volume dried up along the low of the base, which is constructive. The 50-day moving average has also provided strong support since initially breaking out in mid-May.

DLLR finds itself in a hot sector, as many credit services stocks like FCFS and EZPW have seen tremendous runs despite the market's weakness. DLLR looks to be forming a flat base, with support around 20 and resistance slightly above 23. A break of 23.50 would lead to new all-time highs.

IPSU is consolidating nicely after a high-volume move up to 22. The strong volume within the base indicates the stock is being accumulated, and I'd look for a break of 22.40 for confirmation of a second leg higher.

PRGO is currently forming a cup-with-handle pattern, as the recent move up to 92 has been followed by a few days of light volume retracement. The 10-day moving average provided support today, and the 20 and 50-day lie nearby to provide a cushion should prices dip further. A move above last Wednesday's high of 92 would constitute a buy point.

VRX has been coiling since early April, demonstrating its immunity to the market's weakness. Volume has been notably low within the base, and the price action has been fairly tight, both of which indicate institutional support. A high-volume move above 55 would get my interest.

Elevator Up

A well-known Wall Street saying goes that stocks take the stairs up and the elevator down. Uptrends are typically more gradual, whereas sell-offs feature violent drops as traders dump their positions out of panic. Fear trumps greed as the more powerful human emotion, and this past week exemplified how fear can actually result in an explosive move to the upside. Prior to the commencement of trading last week, the major indices sat perilously on the verge of falling below their respective 200-day moving averages, and the S&P 500 appeared to be trapped in a trading range between 1300 and 1260. Sentiment was overwhelmingly bearish, and in typical stock market fashion, the market fooled the majority of participants. Suddenly, everyone who found themselves with short exposure or a lack of long positions experienced the same fear that most feel during a sell-off, except this time the fear came from being under-invested. First the SPX broke above the top of its prior range at 1300, then plowed full-speed ahead above the 50-day moving average and a downtrend line dating back to early May. With each passing day, traders felt more anxious as their heavy-cash position caused them to under-perform their major benchmarks. The nearly 6% move in the SPX last week shows a story of capitulation, as initially cautious participants eventually forced themselves into the market. After making up tremendous ground, the SPX now finds itself back near the 1345 area, which proved to be resistance in February and twice again in May. Many market-leading stocks look over-extended, so a pause here would be healthy and would give a lot of stocks an opportunity to catch their breath before proceeding higher. Here's a list of stocks I'll be watching as potential long candidates:

CPO held up well during the market correction in June and looks poised to break this descending trendline.

The auto parts sector has been very strong lately, and AZO looks like it wants to take out 300. The round number was resistance back in late May, and once these psychologically important areas get taken out, stocks tend to have nice runs.

UA has recovered from its April gap-down very impressively, as it climbed the right side of its base rapidly after finding support around 62. A final pullback (i.e. handle) would strengthen this pattern, and a break above 80 would serve as a nice entry.

After breaking out of a cup-and-handle in May, CSII has formed a base-on-base pattern and looks poised to take out new highs at 15.72. Again, a little rest would strengthen this pattern greatly. The strong volume coming into the stock in the past few weeks indicates it's being accumulated, and if it can break out, the next logical resistance point on the weekly chart isn't until around 19.

CSX has been consolidating between 24 and 27 since March, and the pattern is nearing resolution. I'd look for a few days of sideways action, then buy on a move into all-time highs.

ROST is forming a symmetrical triangle, printing lower highs and higher lows. The 50-day moving average has provided solid support, and a break above 82.50 should lead to nice continuation.

ILMN tried to break out in April and ended up forming a base-on-base pattern. The stock now finds resistance at the highs from mid-May, as it has pulled back the last few days after probing that area on Wednesday. The 50-day moving average has acted as great support, indicating that institutions are supporting the stock on any pullbacks to that area. A few more days of light volume consolidation would set up a nice cup-and-handle pattern, with the buy point through 76.81.

NUS is a bit choppy, but it nonetheless looks to be forming a pennant after testing the 50-day moving average a couple weeks ago. The weekly chart shows a stock that has consolidated beautifully after breaking above 33, and a break of 39 should lead to more upside.