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The Purple Crayon: Flashing a Yellow Light

Fin - Breakout - US

When last we left the Purple Crayon, the S&P 500 was trying to hold 1,340, oil was in danger of breaking down, silver was dead and gold was iffy.

Fast forward one week, and we've had some rather harrowing chart developments. We've got a decent amount of ground to cover, so let's cut to the chase and take a firm look at the present and a vague glimpse into the future through the magic of the chart!

* The S&P 500 support level of 1,340 I discussed last week is broken. As crayon devotees know, I use a thick line to avoid confusing a slight support break with an actual trend change. S&P 1,340 was the support I was watching. I wasn't alone. It seems everyone and their dog was watching 1,340 based on both anecdotal evidence and the excessive trading within 5 or 10 points of the "magic" number over the last two weeks.

On Monday, the S&P closed in the 1,320's. No rationalization, no tears and no regrets -- support is broken on the broader market. That doesn't mean the end of the world, but it does mean my trading viewpoint is now one of selling rallies. Buying dips is a strategy for uptrends. We're not in an uptrend anymore.

* Gold and silver have taken different roads. The former continues to look sort of OK. The key here being "sort of." The uptrend as I draw it is intact, but hardly a screaming buy sign. Silver remains something I wouldn't buy, sell or hold. Silver isn't even interesting theater anymore. It's a relatively thinly traded commodity that just finished making a blow-off top. If you insist on trading it, knock yourself out. My official stance on silver is slouching and shrugging with a "whaddyawant from me?" expression.

* Copper, known as Dr. Copper for it's alleged ability to trend ahead of the global economy, has started making a series of lower highs and broken below $4, an oft watched level, after peaking over $4.50 last February. Copper's slide isn't yet a clarion call in terms of an economic collapse, but keep it in on your radar.

* The oil services companies, represented by the OIH, former market leaders, have rolled over in a meaningful way. If you caught the 60% rip since last summer, hats off to you. The chart suggests there are going to be motivated sellers until support, which is roughly "much lower." It's not a sin to take gains. It is a sin, at least in the Church of Macke, to give up your profits in the name of "avoiding taxes" or because you're "a long-term holder." Paying taxes is American, and the whole idea of long-term holding is to make gains like 60%. Declare victory and leave (also not a bad military strategy).

* Consumer staples! Hooray, we found a winner! The consumer staples ETF (XLP) is chock full o' American goodness. You may find Phillip Morris (both international (PM) and "Altria" (MO), respectively) and Molson Coors (TAP) unseemly, but nobody doesn't like Sara Lee (SLE) and with a name like Smuckers (SJM) it has to be good ... at least for now.

Add it up, and we have busted former leaders, a big rotation and an increasingly lousy looking S&P 500. Nobody gives you a medal for holding through dips. A perfectly natural correction, such as we had a year ago, could take the S&P as low as 1,056 before it even became what's classified as a bear. The market needs a breather, corrections are normal, and the trend is no longer your buddy.

You can fight the tape all you want. As for me and the Purple Crayon, I've cut my stock exposure in half and plan to use some of the proceeds to take my kids to a theme park in a couple weeks. Really. I find it much more relaxing and far less self-defeating than throwing my hard-earned cash at a falling market.

(If you want a primer on the thought process on the Crayon check out my April 8th edition. It's all about giving traders another tool with which to assess the market and helping them apply an unemotional discipline for buying and bailing. )