Price volume action from the start of the rally was worrisome, but over the last two weeks, price volume has clearly turned bearish, indicating the path of least resistance is down. The market has attempted to rally on a few days and reverse higher on others, but volume has failed to materialize. When volume does run higher, the market has either been distributed or stalled (another form of distribution). The NYSE advance decline, the main positive during the rally, has maintained its down trend. The good news is that it marked new highs before the pullback began, indicating that a bear market is not in the cards, yet. But a major correction that feels like a bear market is completely possible.
Leading growth stocks have stopped breaking out and started breaking down. Stocks have bounced with the market the last few days, but volume has been lower. Most will need at least a few weeks to consolidate, while a few could be ready over the next two weeks assuming their consolidation do not fall apart. Of course not all stocks are acting poorly: Whiting Petroleum (WLL) gapped off the twenty day moving average, in well above average volume, on news it was buying Kodiak Oil and Gas (KOG), which itself gapped out of a four week tight pattern on the news.
Short trading idea stocks have started to roll over in heavier volume and tighten for further downside. Recent breakdowns have been able to hold or follow through to the downside. Middleby (MIDD), Las Vegas Sands (LVS), Bofi Holdings (BOFI) are rolling over at the fifty day moving average in heavier volume.
With the market clearly in a correction, traders should use strength to sell any remaining long positions with little to no profit cushion, and initiate short positions, if their not in cash or short already. Stocks should rollover and keep following through to the downside or consider tightening stops to minimize losses and protect small profits.
Full Disclosure: Position in LVS.