Trouble in the charts sent one previous market bull running to sell all his stocks, as Todd Gordon of TradingAnalysis.com sees two key “warning [signs]” brewing that could take down the rally.”I flattened out all my positions on the 21st,” he said Thursday on CNBC’s “Trading Nation.” “I am carrying no long positions right now and for the first time in months, and I’m actually finger on the trigger to go short.”
The first of these warnings signs, according to Gordon, lies with small-cap stocks, often seen as an indicator of domestic economic performance. Small caps surged about 16 percent the month following November’s election, but since then the Russell 2000 index has actually fallen flat year to date.
When measured against the performance of the S&P 500, as Gordon looked at with two ratio charts, it’s clear that a “big time underperformance” began to take place in mid-December.
The second of these warning signs lies with recent trends in the Nasdaq. More specifically, Gordon points to what he calls an “outside reversal bar” that occurred on Tuesday. An outside reversal bar, according to Gordon, is an individual trading day with a high matching the prior day’s highs, but with a close below the previous day’s low.
On Tuesday, stocks suffered their worst session in months, as the S&P 500 had its first 1 percent intraday move of the year.
Gordon’s concern doesn’t simply stem from the fact that an outside reversal bar occurred on Tuesday, but that it has been seen four times total dating back to March 1. In other words, the Nasdaq has closed at lower lows four times in the previous 14 trading days, which Gordon believes is a bearish sign for markets despite the index hitting another record high just last week.
Putting it together, “The underperformance of the small caps over the last two months coupled with a significant reversal in the Nasdaq makes me very cautious of this market going forward,” Gordon explained.