Coming into today’s trade, bonds rose overnight in a volatile overnight session. Bonds have actually been rising since last week’s FED minutes and are now at their highest level in a year. Benchmark Treasury yields hit 2.235 percent.
There are some other clues though indicating that the market is about to roll over.
First let’s take a look at some sectors that usually foretell these kinds of corrections.
I’ll take a look at the hardest hit one first, the Utilities, which were down 1.55% today after getting beaten up pretty good since the fed chairman spoke last week. Note the clear head and shoulders topping pattern that formed just before the break of the neckline. The utilities are now down over 7% since their May 22 high. Note that head and shoulder topping patterns usually result in a drop that equals the rise from the neckline. However, the drops can often become extended and there is a very real probability that the next level of support for the utilities may be the 200 day moving average. The MACD and the RSI indicate that the utilities are oversold here but we all know markets can remain overbought or oversold for extended periods of time (just look to recent gold and silver action for proof).
Next, let’s look at the Transportation Average which has also formed a bearish head and shoulder topping pattern.
Note the clearly defined topping pattern in the Transports with the average right at the neckline. The MACD has had a bearish crossover and the RSI is now rolling over. we could be at the cusp of a quick 4% correction in the transports.
Next note the Dow Industrial Average: The 15,552 intraday high represents a 352 move from the neckline. a corresponding breach of the neckline could put the DOW at 14,800 in short order which corresponds with the 50 day moving average. However, there are a couple of items needed when analyzing a double top. That is, that the decline can often far overshoot the projected stopping point, especially if a lasting top is in place.
While this is not a “classic” double top, where I would prefer to see greater time between the peaks, it may imply a short term top rather than a lasting top and give us a clue that the main indexes will soon follow the Utilities and Transports down. This is especially true when we note the divergence that has occurred between the Utilities and the DOW as indicated below.
Note how the utilities and transports have for the most part mirrored their moves. the head and shoulders top breakdown in the utilities is clearly visible (blue line) but the Industrial Average has continued to go up despite the breakdown in the utilities. You can see the double swing at the top of the DJIA in this chart as well.
The bottom line is that today may have just started the log awaited correction in equities. Keep an eye on the bonds and on the internals for further evidence and with all patterns, wait for confirmation.
It may take a while to provide any real confirmation that a lasting top is in place meaning we may see a resumption of the upward move after a correction if one occurs, however, just look to Japan for an example of what happens when everyone decides to take their money off the table and the margin calls start coming in. That index shed 7% in one session. Granted, it had a greater parabolic move preceding the decline but look at the rise in the Industrials since the latter part of 2012 compared to the identical rise in the utilities. With such a divergence, my bet is that the Major indexes will follow rather than the utilities reversing to reverse that divergence.
