Dow Jones Industrial Average: 4 Charts Showing Warning Signs

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August 14, 2013 1:01pm NYSE:DIA NYSE:SPY

market caution: With the summer months drawing to a close, it has been a somewhat warm few months for the stock market with the S&P 500 (INDEXSP:.INX) and Dow Jones Industrial Average (INDEXDJX:.DJI) recently at record highs.


Yet we are now seeing a pause, which may or may not be an indication that the current stock market rally has fizzled out after sizzling higher on the charts. Now, I would not be surprised to see a five-percent (or more) stock market correction. In fact, I would love to see a stock market adjustment.

Some of the market leaders in 2012 and 2013 are beginning to fade, and this indicates a possible near-term stock market top.

The leadership of the banks is sliding. The chart of the Philadelphia Bank Index below shows the current situation of a potential bearish double-top forming in these stocks. Failing to attract support (at the bottom blue support line to the right of the chart) could see bank stocks drop lower on the charts, and they will take the broader market down with them.

Bank Index chart

Chart courtesy of www.StockCharts.com

We are also seeing some exhaustion in the previously sizzling housing market. (See “Why the Housing Market Is Eyeing the Fed’s Bond-Buying Strategy.”) The chart of the S&P Homebuilders Index below shows the current downward trendline after the index peaked in May. A closer look shows that a bearish descending triangle may be in the works, which could see the housing sector stocks fall through the lower support line.

Based on my technical analysis, and as I have said in previous commentaries, I would be very careful about chasing housing stocks higher. The easy money in this sector has already been made.

S&P Homebuilders Index chart

Chart courtesy of www.StockCharts.com

The S&P 500 also looks a bit tired following its breakout in early July, as shown by the blue circle in the chart below. The index is hesitating and moving sideways. A retrenchment could drive the index back below the horizontal support level.

S&P 500

Chart courtesy of www.StockCharts.com

Now, look at the chart of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). The chart shows traders are calm and relaxed with little fear of what could happen. The last time the VIX was this low was back in 2007, and we all know what followed shortly thereafter: the Great Recession in 2008.

Volatility Index chart

Chart courtesy of www.StockCharts.com

Complacency in the stock market is often a death wish that could result in a disastrous end. Don’t get too relaxed at this time, or you could find yourself singing the blues from the sidelines very soon.

So while the stock market could edge higher, these four negative charts shown above suggest to me that there could be a relapse on the horizon.

This article is brought to you courtesy of George Leong from Profit Confidential.


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