I indi­cated in Sunday’s “Words from the Wise” review that “the speed and sheer mag­ni­tude of the rally argue for mar­kets to either con­sol­i­date or retrace some of the past nine weeks’ gains prior to mov­ing higher”.

Is the rally about to be reigned in? While most major stock mar­ket indices are encoun­ter­ing resis­tance at their 200-day mov­ing aver­ages and/or at the early Jan­u­ary highs, a few other indi­ca­tors also war­rant our attention.

Two sec­tors that have been lead­ing the over­all mar­ket higher dur­ing the rally that com­menced on March 9 — small caps and tech­nol­ogy — have reversed their out­per­for­mance, as seen from the turn­around in the rel­a­tive per­for­mance. The first chart plots the Nas­daq Com­pos­ite index rel­a­tive to the NY Com­pos­ite Index, while the sec­ond com­pares the per­for­mance of the Rus­sell 2000 Small Cap Index with that of the S&P 100 Index (large caps). A ris­ing rel­a­tive strength line indi­cates out­per­for­mance and a declin­ing line underperformance.

Source: StockCharts.com

Source: StockCharts.com

I will keep a close eye on these two charts as rel­a­tive weak­ness of small caps and tech­nol­ogy will not be a good sign for an over­all mar­ket that is over­bought and look­ing exhausted after its mon­u­men­tal rally over the past nine weeks.

Another interesting-looking chart is that of the S&P 500 Index’s Bollinger Bands. Although a close below the 20-day mov­ing aver­age (dot­ted blue line) is required to con­firm a cor­rec­tion, the fact that the price is touch­ing the upper band indi­cates a short-term over­bought con­di­tion. Also, the black line in the bot­tom sec­tion of the chart — mea­sur­ing the width of the Bollinger bands — has turned up and is sig­nal­ing expand­ing bands. This usu­ally points to ris­ing volatil­ity and lower prices, sim­i­lar to those expe­ri­enced at the Jan­u­ary and Feb­ru­ary lows.

Source: StockCharts.com

For those who missed the item over the week­end on Adam Hewison’s (INO.com) tech­ni­cal analy­sis of the S&P 500’s most likely direc­tion and impor­tant chart lev­els, click here to access the video presentation.

I still main­tain that US and other mature stock mar­kets are in the process of map­ping out a base devel­op­ment for­ma­tion which prob­a­bly means toing and fro­ing between pol­icy tail­winds and eco­nomic head­winds. It is only nat­ural (and nec­es­sary) that profit-taking should set in after the strong advance; a pull­back should not be too much cause for con­cern, pro­vided the lev­els from which the rally com­menced on March 9 hold.

Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.

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