Be on Alert for This Bear Market Signal

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The Dow Jones Industrial Average fell 0.7% Monday and concluded the worst month for the index since May 2010. However, a rebound in energy prices overshadowed a triple-digit decline on the Dow. Crude oil reversed from the low of the day at $43.60 to settle up 8.8% at $49.20 a barrel.

The jump in energy prices was attributed to an Energy Information Administration report that showed monthly production in June to be about 100,000 barrels per day less than May and 400,000 less than April. Energy was the best-performing S&P 500 sector, rising 1%, and the only sector showing a gain for the day.

The benchmark 10-year Treasury note’s yield rose to 2.20% from 2.19% on Friday. Gold futures fell 0.1% to $1,131.60 an ounce.

At Monday’s close, the Dow Jones Industrial Average fell 115 points to 16,528, the S&P 500 lost 17 points at 1,972, the Nasdaq fell 52 points at 4,777, and the Russell 2000 was down 3 points at 1,159.

The NYSE Composite’s primary market traded about 1.1 billion shares with total volume of 3.9 billion shares. The Nasdaq crossed 1.8 billion shares. On the Big Board, decliners outpaced advancers by 1.3-to-1. On the Nasdaq, decliners were ahead by a small margin.

For the month of August, the Dow Jones Industrial Average lost 6.6%, the S&P 500 fell 6.3%, the Nasdaq dropped 6.9% and the Russell declined 6.1%. The 10%-plus pullback from the May highs in the Dow and S&P 500 qualifies as the first “official” correction since 2011.

SPY Chart
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In the Aug. 24 Daily Market Outlook, readers were given a preview of the 17-month moving average chart of SPDR S&P 500 ETF (SPY). I said, “Our trusty chart of the S&P 500’s 17-month moving average has triggered the first sell signal since 2011. In 18 years it has issued sells five times, of which two were reversed back to buys (’98 and ’11), but two (’01 and ’07) signaled the beginning of major bear markets. ”

Dow Jones Industrial Average Chart
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Chart Key

The Dow Jones Industrial Average broke October’s closing low, a tentative sell signal. I say “tentative” because in order to establish a new trend, resistance must be tested and another new low established. That has not yet occurred, but if the industrials break below 15,871.35 on the close, a new downtrend will be set.

Dow Jones Transportation Average Chart
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Like the Dow industrials, the Dow Jones Transportation Average set a closing low under the October closing low. Thus, a failed rally and a new closing low would also establish a new downtrend.

Conclusion

As a Dow Theory technician, I am close to calling a new bear market, but close is not enough. In order to establish a new trend, a critical new low under an old support point must be set and a rally must fail, followed by a new low.

The October closing low at Dow 16,117.34 is generally considered by many technicians to be an important “inflection point.” A close under that closing low is significant and, if confirmed by the closing October low of the Dow transports, would signal a Dow Theory bear market.

The possibility of a new bear market is confirmed by the sell signal rendered by our own 17-month moving average chart of SPY. It has flashed a sell signal for only the fifth time in 18 years.

We are now in a bear market alert status. Thus, even though the signal has not yet been given, I believe that just prior to any major storm our readers should plan on protective measures that would stand up against the worst. Perhaps the storm will veer off course and leave us dry. But we can’t count on that.

At a minimum, take short-term profits, hedge with protective options strategies and take no new bullish positions except under very special circumstances, and then only with protective stop-loss orders.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, https://investorplace.com/2015/09/daily-market-outlook-be-on-alert-for-this-bear-market-signal/.

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