Failed Breakouts = Caution

The ultimate sign of a healthy market is a level of buying power that overwhelms selling pressure. Stocks advance, consolidate for a period of weeks or months as shares exchange hands, and then continue to run higher as the bulls regain control and put the bears in their place. These consolidation ranges display clear levels of supply and demand; in other words, we can see at what price investors believe shares are too expensive, and at what price they think shares are too cheap to pass up. As price continues to get negotiated between buyers and sellers, there eventually comes a catalyst -- perhaps an earnings revision or analyst commentary -- that shifts the balance of power to either the supply or demand side. When a stock breaks higher, the bulls have clearly won and demand has exceeded supply. But what happens if the buyers can't sustain any meaningful move? What if a stock drifts higher for a few days, only to get slammed a couple days later in an inundation of supply, with buyers nowhere to be seen? That would indicate the momentum has shifted away from the bulls and back to the bears - not a good thing to witness if you're long of stocks. A major negative for this market is that a good number of stocks from a variety of sectors recently broke out of sound technical bases -- only to see sellers regain control and reject the bulls' efforts.

With that, let's take a look at some stocks that appear to be reversing course:

One especially troubling aspect about the charts above is that they cover a wide spectrum of sectors (i.e. this isn't just a "tech" issue or a "commodity" issue). If this was all just based off of the FFIV carnage, that would be one thing. But the variety of stocks that appear to be breaking down makes me very cautious about the market going forward. Should we see a couple more distribution days in the major averages, along with continued unimpressive price action from leading stocks, this may be at least a temporary end to the run we've experienced since September.