A potentially significant warning sign

The chart above is a weekly snapshot going back to before the 2008 financial crisis. The green line is the upper band of the DJIA measured over a 16 week period. The red line is the lower band. The yellow line is the weekly close of the DJIA.

Looking at the green line during the collapse of the equity markets in 2008/09, the market moved significantly below the upper band in a manner that was unique. When the market hit bottom and started to reverse to the upside, it proved its bottoming was complete when the upper band was forced to move dramatically lower to meet the weekly closing index. That was an incredibly important buy signal.

Since then, the upper band has tracked closely to the DJIA weekly closes.

Since 2009, the lower band has at times shown gaps away from the Index, gaps that were ultimately closed by downward corrections in the index (see the red line gaps from the Index and the trigger points that caused the lower band to move up to meet the weekly close). Now focus on the most recent data. Starting 40 weeks ago the lower band and the index began to separate once again. This time the separation spread continued to widen beyond what historically would indicate a small correction was due. If you look at the most current point, the spread is roughy equivalent to the spread that existed in 2009 when the market finally reversed to the upside (4,000 vs 4,500 point spreads). Additonally, the magnitude of the spread for both periods are outliers, and in 2008/09 it preceded the bottom. This inidcator tells me we are close to a top and a sustained move lower, a move that will not be a typical correction in size, but will reflect a bear market.

Author: Thomas Connolly

Tom possesses a rich and diverse background that includes deep investing experience, senior corporate executive positions, and roles as a Regional Managing Partner and Global Industry Leader within Ernst & Young. He has advised executives on some of the largest acquisitions and dispositions in the Media and Entertainment industry, including clients such as Comcast, Citibank, Sony, Dalian Wanda and Publicis. Tom is a Certified Public Accountant with a Masters Degree from Columbia University. His skills are further accompanied by a personal passion for the study of economic trends and evolving market dynamics.

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