All major U.S. stock indices lost ground last week, led by the broad market S&P 500, which was down 1.1%.

#-ad_banner-#​Halfway through the month, the market leading Nasdaq 100 (NDX) continues to stall just below formidable overhead resistance at 4,147, which I first discussed in the Aug. 25 Market Outlook. With the small-cap Russell 2000 the only major index in negative territory for the year, technology stocks have been responsible for market leadership. Without a significant and sustained rise above 4,147, or a strong surge higher by the Russell 2000 to pick up the slack, a broad market pullback is likely coming soon.

All 10 sectors of the S&P 500 finished in negative territory for the week, led by energy, which was down 3.6%.

My own metric based on ETF asset flows shows that the greatest outflow of sector-related assets over the past one-week, one-month and three-month periods was from the energy sector, which explains why it has been the weakest sector for each of these periods. Although my longer-term metrics suggest there will be an opportunity to buy energy-related assets in late 2014 or early 2015, for the time being, as long as investor assets continue to contract, the energy sector will weaken.

Weak Industrials, Increasing Fear Are Red Flags

Our first chart this week shows that the recent new closing high in the Dow Jones Transportation Average was not accompanied by a corroborating new closing high in the Dow Jones Industrial Average. According to Dow Theory, the longer this non-confirmation exists, the more likely it will lead to a pullback/correction in the overall market.

In addition, investor fear is beginning to subtly but meaningfully increase, according to the CBOE Volatility Index, better known as the VIX or the fear gauge.

The VIX has moved above its 12.93 50-day moving average during the past few trading sessions. The last time this occurred was from mid-July to mid-August, and it coincided with a near-term decline in the S&P 500. If the VIX remains above 12.93 this week, I expect last week’s market weakness to continue.

With today’s weak opening and jump in the VIX, readers should consider closing out positions in the SPDR Dow Jones Industrial Average ETF (NYSE: DIA). It is up 2% since I first identified it as a buying opportunity in the May 12 Market Outlook.

Rise in Treasury Prices Has Stalled

Almost six months after I highlighted a bullish opportunity in long-dated U.S. Treasury prices, it looks like the trend has at least temporarily stalled.

The iShares 20+ Year Treasury Bond (NYSE: TLT) collapsed below its 2014 uptrend line on Friday, right after moving above formidable overhead resistance at its $118.05 September 2012 benchmark low in late August. This indicates investors have at least temporarily given up on the prospects for continued strength in Treasury prices. More near-term weakness is likely.

Bigger picture, I see the potential for one more move to fresh highs in long-dated Treasury prices between now and year end, while the yield of the benchmark U.S. 10-year note declines to the 2.23% area. For now, however, readers may consider closing out long positions in TLT, which have accumulated a nearly 5% profit since my March 31 recommendation.

Dollar Strength Weighs on Commodity Prices

In the Aug. 18 Market Outlook, I pointed to the Market Vectors Coal ETF (NYSE: KOL) as a potential candidate for defensive diversification because it had just broken higher from more than a year of sideways, coiling trading activity. Sideways action such as this typically represents the accumulation phase of an emerging price advance, and it targeted an eventual rise to $21.75, which sits almost 19% above current prices.

However, due at least in part to the recent spike higher in the U.S. dollar, which has put significant downward pressure on commodity prices, last week’s move by KOL back within the boundaries of the pattern calls its bullish implications into question.

A deeper decline below the ETF’s $18.31 June 4 low would negate the $21.75 upside target and clear the way for more potential near-term weakness.

Putting It All Together

This week’s charts underscore the importance of having a methodology and a plan in place that not only includes upside expectations, but also what to do when price trends unexpectedly change direction.

For the past several weeks, I have identified the current level in the U.S. stock market as being an important inflection point from which its 2014 advance should resume — if still healthy and intact. I also identified a number of headwinds for the market including overhead resistance in the Nasdaq 100, historic extremes in bullish investor sentiment, weakness in European stocks and bearish September seasonality.

During the past week, the Dow industrials’ inability to move to new highs, coupled with subtly rising volatility according to the VIX, warn that a pullback/correction of some degree may be getting under way. Amid these conditions, readers should consider more aggressively protecting profits over the next several weeks.

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