Perhaps Monday’s strong rally absorbed too much buying power from the stock market, because on Tuesday, the main indexes couldn’t sustain the bullish momentum.

The major indexes gave back a good chunk of the previous day’s gains. After soaring 3% on Monday, the Nasdaq composite retreated 1.7%. The S&P 500, which jumped 2.4% Monday, fell 0.8%.

While some backtracking was not surprising after indexes made their best gains in months, the market left more to be desired. Indexes slid in the final hour of trading and closed near session lows. That’s uncomfortable action, especially when you study the index charts.

The Nasdaq shows ambiguity. While the composite climbed back above its 50-day moving average Monday, it has been meeting resistance for more than a week at the 21-day exponential moving average. The S&P 500’s chart looks a bit better, with the index closing above its 50-day average and right at the 21-day line.

Mixed signals reflect a stock market whose direction is in doubt, and investors should remain cautious for now. IBD’s market outlook was lowered to “uptrend under pressure” on Thursday and remained unchanged even after Monday’s rally.

Prepare For Shift In Stock Market

MP030221_3-Investors should be preparing for a market turn in either direction. Taking some profits and being picky with stock purchases is smart right now. At the same time, investors need to be prepared also for a bullish shift in the stock market. Be watchful of stocks nearing or already in buy areas.

Relatively few top-rated stocks are forming bases. But dozens are testing or finding support at the 10-week moving averagePayPal (PYPL), Taiwan Semiconductor (TSM) (both IBD Leaderboard members) and Logitech (LOGI) are some to watch.

Volume eased on the Nasdaq. But it increased on the NYSE, which gave the S&P 500 another distribution day.

Tuesday’s stock market’s decline was more uneven than broad. Growth-heavy sectors such as technology, consumer discretionary and internet came out the worst. The cyclical materials and transportation sectors climbed. Materials Select Sector SPDR ETF (XLB) rose 0.6% and Transportation Select Sector SPDR (XTN) inched up 0.2%.

Semiconductor shares were some of the hardest hit. The Philadelphia Semiconductor Index fell 3.1%. The iShares Expanded Tech Software ETF (IGV) lost nearly 2% and settled right back below its 50-day moving average.

IBD 50, Small Caps, Dow Fall

Put-call volume ratio was 0.56 Tuesday, as this gauge of investor sentiment continues to lack any sign of fear. Even after Friday’s sell-off, the ratio was a relatively sedate 0.71. Indeed, bullish sentiment has become a long-term trend, rather than a signal.

The IBD 50 fell 2% Tuesday. The Dow Jones Industrial Average lost 0.5%, and the small-cap Russell 2000 slid 2%.

Some of the major earnings reports also reflected investor nervousness. Target (TGT) reversed lower despite a strong holiday quarter. The retailer announced plans for massive spending on e-commerce, which appeared to sour investors.

Electric-vehicle maker Nio (NIO) plunged 13% after a mixed quarterly report. Nio also warned that a chip shortage will hurt production. Zoom Video (ZM) reversed sharply lower. The videoconferencing app provider posted solid numbers for its January-ended quarter. But analysts weighed fiscal 2022 guidance and more competition from Microsoft (MSFT).

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Juan Carlos Arancibia is the Markets Editor of IBD and oversees our market coverage. Follow him at @IBD_jarancibia