Investors Beware: Underlying Weakness in Stock Market

By George Leong

The Dow Jones Industrial Average (DJIA) is down 2.3% from its record-high on May 28, but just like the S&P 500, the DJIA appears to be flashing some fatigue on the charts, suggesting some stock market risk and possible market correction.

Now, this may only be a temporary pause, or it could be foreshadowing some upcoming selling, stock market risk, or a potential buying opportunity.

The chart featured below of the DJIA (shown in the red candlesticks) and the Dow Jones Transportation Index (in green) shows a decline in both (marked by the larger purple oval). This may indicate that something bigger is coming, or, as the case was in mid-April (as indicated by the smaller purple oval), we may just be seeing a market adjustment prior to another rally.

Chart courtesy of www.StockCharts.com

What will be interesting to monitor is if the transports follow the industrials higher on the chart. If so, it would help to confirm the move in the industrials.

If the transports fail to follow the industrials higher, however, it could suggest a bearish divergence and stock market risk, pointing to some upcoming selling.

The reasoning of Dow theory makes sense: if the country is producing and selling more goods, then we can expect the shipping business to also rise, including rail, truck, and ship, which is something the transports will indicate.

At this point, the industrials and transports are confirming each other. On the industrials, watch the 14,500 to 14,750 area on the above chart. Failure to hold here could drive stock market risk and cause the industrials to retrench to their previous sideways channel below 15,000.

Also on a technical note, the new highs and lows on the New York Stock Exchange (NYSE) High-Low Index are also showing some wear and tear from over the past seven days. The chart featured below shows the recent flattening after the run-up and possible stock market risk.

Chart courtesy of www.StockCharts.com

For instance, in the period from May 23 to June 3, there was a daily average of 85 new highs and 14 new lows. In comparison, from the start of the year to May 22, the daily averages delivered 217 new highs and 13 new lows—more indicative of market strength.

The underlying market breadth on the NYSE, as reflected by the advance decline line, also shows some weakness, as indicated by the reversal in the chart below, and added stock market risk.

Featured below is the NYSE Advance Decline Line chart, from April 8 to early June:

Chart courtesy of www.StockCharts.com

The reality is that the stock market is showing some fragility, so there could be some stalling or market adjustments surfacing in the coming weeks if the stock market risk rises.

Just be ready for a possible buying opportunity on any sustained period of selling.

This article Investors Beware: Underlying Weakness in Stock Market  was originally published at Investment Contrarians