What Traders Should Do After the Most Powerful 3-Month Advance in Years

It may be wise to pocket profits from any big winners and await the signal that the major advance is again under way

By Sam Collins, InvestorPlace Chief Technical Analyst

New York, Apr.2, stock picks .- Stocks closed lower Monday on weaker-than-expected U.S. economic data, but volume was light due to the close of European markets on Easter Monday. The ISM manufacturing purchasing managers index fell to 51.3 in March, which was below an expected 54. But February construction spending rose 1.2% where 1% was expected.

At the close, the Dow Jones Industrial Average was off 6 points at 14,573, the S&P 500 fell 7 points to 1,562, and the Nasdaq lost 28 points at 3,239. The NYSE traded 573 million shares and the Nasdaq crossed 381 million. Decliners outpaced advancers on the Big Board by 2.1-to-1, and decliners were ahead by 2.7-to-1 on the Nasdaq.

The S&P 500 made a new closing high on Thursday, but failed to follow through Monday to take out its all-time intraday high of 1,576.09.

The S&P 500 is a broad-based index of 500 of the best companies in America. A cross-section of quality companies is provided by the NYSE Composite Index, which is comprised of every stock traded on the Big Board, including some non-U.S.-based companies.

Click to Enlarge

The NYSE Composite has been advancing at about the same rate as the S&P 500. However, unlike the S&P 500, it is not close to its all-time high made in late October 2007 at 10,387.

This index contains some foreign, some highly speculative, and a number of investment-grade stocks. Since the mix is broader than either the S&P 500 or the Dow 30, and includes more speculative issues like those in the Nasdaq, I consider it a better indicator for future direction than any of the other indices.

Its uptrend line is sharp but not nearly as steep as the Dow transports, yet steeper than the Nasdaq’s. And while the Nasdaq, with more volatile issues, was down Monday, the Composite gained 0.71 points.

Note the recent consolidation with resistance at 9,124 and support at 9,005 — a very narrow range compared to the other indices. Finally, like the S&P 500, the Composite is very close to a new high for the year, and its MACD internal indicator is within one bar of issuing a buy signal.

Conclusion: The NYSE Composite is worth watching since a break to new highs would probably be the first indicator that the S&P 500 and the other indices are ready to pick up the pace again. However, the overall trend is arching to the right, telling us that the advance is slowing and that momentum is not as strong as in early February.

After the most powerful three-month advance in years, it may be wise to pocket profits from any big winners and await the signal that the major advance is again under way before committing new capital. Remember: “Bears can make money. Bulls can make money. Pigs get slaughtered.” ...