Over the past two or three weeks I’ve mentioned a few times that in two of the past three years we have seen a significant market correction in January. Now the New Year is here and while a major sell-off hasn’t started yet, there are plenty of indications of market weakness, especially for the Nasdaq.

Let me illustrate what I mean with the chart below. The top portion is the daily price action of the Nasdaq (black line). You can clearly see that after peaking in November, this index has lost momentum and has been drifting sideways. The gold line is a 50-day simple moving average. After trending strongly above this line since mid-August, the Nadaq is now resting right on its 50-day MA.

The next portion of the chart is a Relative Strength Index. This important line on this indicator is the 50 mark. When the index is trending above that line, momentum is positive and the index has the strength to advance. If it trends below that mark, momentum is negative and there is not enough strength to sustain and upward trend. Once again we see that the index is hovering right at the 50 level.

The next portion of the chart shows a moving average convergence divergence (MACD). On this indicator the zero line marks the point that separates positive and negative market movement. Once again we see that the indicator is right on that border.

Finally, the bottom portion of the chart shows a momentum indicator. Black areas above the zero line show positive momentum and blacks areas below that line reflect negative momentum. Momentum is currently right at the zero mark.

What all this means is that the Nasdaq is at a critical juncture and investors need to carefully watch positions that are highly correlated to the Nasdaq. For now, the S&P 500 and the Dow remain in uptrends and have not shown the same level of weakness as the Nasdaq.

Today’s strong move by the Nasdaq was encouraging, but we saw a similar gain quickly disappear during Tuesday’s trading session. It is too early to declare the end of the bull run that began in late summer 2006, but there are cedrtainly plenty of signs right now telling us that we need to be cautious.

F.S.