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Commentary: With the markets kicking the short holiday week off by pulling back nearly 3%, it may be a good time to take a look at how some recent market leaders are faring. It is always important to keep tabs on the stocks that have been leading the way higher. Often these stocks will reveal clues about the market’s direction far earlier than the indexes.

If any one stock could be considered a market leader, it would have to be Apple (Nasdaq:AAPL). AAPL was one of the first stocks to recoup its bear market declines and has been hitting new all-time highs since late 2009. It continues to find buyers on every pullback. While AAPL was at new highs as recently as last week, traders should be wary of the recent price action. AAPL suffered through some selling in mid January, when news emerged that CEO Steve Jobs would be stepping down due to health issues. After bouncing to new highs, AAPL now finds itself back in the middle of the “post-Jobs” trading range. In addition, overall volume is now very high considering the stock’s price is basically in the same place. This is a warning sign that distribution may be taking place. Traders should keep a close eye on the $325 level, which held in January and was a prior resistance level. If AAPL falls beneath this level it could confirm at least an intermediate top.

Source: StockCharts.com

Amazon.com (Nasdaq:AMZN) has also been a market leader over the past few years and it too surged to all-time highs in late 2010. AMZN is approaching an amazing $100 billion market capitalization (80.03B as of 2/22/2011) and is the clear leader in the online shopping space. Much like AAPL, AMZN has been under pressure recently. It dropped under an important support level near $173.50 in late January but bounced back a few sessions later. While the bounce took it to its recent highs, AMZN has started to pull back again from the $190s and is threatening to form a double top. Traders should keep an eye on the recent lows near $166 as a drop below this level would confirm the double top. (For more, see Analyzing Chart Patterns: Double Top.)

Source: StockCharts.com

 

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Netflix (Nasdaq:NFLX) is another stock that has been a market leader for the recent rally. As expected, it is also just a few days off its all-time highs. While NFLX also pulled back with the markets on Tuesday, it is in much better shape than some other “leaders”. For one, NFLX is still well above its recent base and has a breakaway gap beneath $204 that may act as support on weakness. While the volume on the weakness is above average, the volume on the breakout was actually higher. NFLX appears to be in good shape and may be a good candidate to watch if the markets continue to shrug off weakness.

Source: StockCharts.com

While many may point to Google (Nasdaq:GOOG) as the obvious leader in the internet search space, the clear leader in terms of stock performance is the Chinese search stock, Baidu (Nasdaq:BIDU). BIDU has rallied from a bear market low near $10 to over $131 in a couple of years. BIDU had started working on a base in late September and after a few shakeouts was able to gap above the base and surge higher. Much like NFLX, BIDU appears to be in decent shape despite the pullback over the past couple of days. BIDU is still above its base; traders should watch gap support to see if buyers step in at these support levels.

Source: StockCharts.com

The Bottom Line
While none of these market leaders has completed any topping patterns, a couple appear to be close. The markets have remained far more resilient than most expected over the past few months, and traders should not rush to call a top on every distribution day. Tops take time to form and the market leaders will likely provide vigilant traders with advance notice. Traders should monitor the action in these stocks to see if market participants still have an appetite for buying the dip. (For related reading, see Trader’s Corner – Shoot The Moon…And Hit It!)

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.