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Shot across the Bow warning?

Are the recent technical conditions including a potential negative outside month on Dow Jones Industrial Average (INDU) during Feb 2020, negative market breadth divergence, expanding implied volatility and the contraction in the spread between the 10-month ma and 30-month ma warning of a matured 10-plus year bull rally?


Tech/Telecom Bubble Debacle

Jan 2000 – Oct 2002 Bear decline (-4,552.71 points or -38.75%)


There were 4 negative outside months in INDU that led to the Tech/Telecom bubble bear market from Jan 2000 to Oct 2002. The first negative outside month occurred on Aug 1999. In hindsight this was an initial warning of an impending major market top. However, it was the second negative outside month 5-months later during Jan 2000 that reaffirmed a major INDU top. From a long-term bull trend perspective, it was the monthly death cross sell signal on Jul 2002 coupled with an oversold rally that failed to surpass its 30-ma (Mar 2002) that reinforced a major trend reversal. This soon triggered a panic sell-off resulting in a climatic Oct 2002 market bottom (7,197.49).


In the enclosed chart you will see that INDU market breadth of advancing issues minus declining issues negatively diverged from its INDU price trend. This non-confirmation of trends warned that the INDU rally to all-time high during Jan 2000 was not sustainable. INDU Volatility Index did not warn of an impending market top. Rather it broke out during Aug 2001 around the midpoint of its Jan 2000 to Oct 2002 bear market decline. However, this expansion in INDU implied volatility suggests widespread fear leading to the ensuing panic sell-off culminating in the Oct 2002 market bottom.


Global Financial Crisis

Oct 2007 – Mar 2009 Bear decline (-7,728.15 points or -54.43%)


Ahead of the global financial crisis and one of the worst bear markets since the great depression, a negative outside month on Feb 2007 alerted astute investors/traders to an impending major market top. However, it would take a second negative outside month approximately 5-months later during Jul 2007 to reaffirm a major market top in INDU. It is interesting to note that a monthly death cross sell signal on Aug 2008 finally convinced investors/traders that this was indeed a major trend reversal. A third and final negative outside month on Jan 2009 led to a panic/climatic sell-off resulting in the Mar 2009 bottom (6,469.95) as volume exploded into the market decline.


Again, INDU market breadth of advancing issues minus declining issues negatively diverged from its price trend. This technical condition coupled with expanding implied volatility further confirmed a bear market decline.


Central Bank Liquidity/Negative Interest Rates/Global Recession?

Feb 2020 – present???


Although we do not believe that the previous market conditions need to be exactly replicated today there is a tendency for markets to rhyme. That is, negative outside months and monthly death cross sell signals do not occur too often. It often would require a collective effort from many market participants acting in unison to reverse the primary and dominant bull trend. Although we believe it may be too early to confirm the end to the current 10-plus bull rally that started in earnest on Mar 2009 we need to be conscious of the prior technical signs that can warn of a maturing bull trend.


As we have highlighted above, in the past 2 bear markets including the Jan 2000-Oct 2002 Tech/Telecom bubble and the Oct 2007-Mar 2009 Global Financial/Recession the following technical conditions warned of an impending market: (1) negative outside months, (2) divergences in market breadth, (3) expanding implied volatility, and (4) death cross sell signal and the subsequent rolling over of the important 10-month and 30-month moving averages.


Today, a negative outside month may be developed during Feb 2020. If we closed the month (2/28/20) at or near the bottom of its monthly trading range this would confirm a monthly reversal condition. In addition, we note that over the past 2-plus months, INDU market breadth has begun to diverge negatively from its price trend and INDU implied volatility trend has expanded. Despite the above averse technical conditions, the spread between the 10-mo ma (27,045) and 30-mo ma (25,620) is still far apart at 1,424.50.


Nonetheless, a confirmed negative outside month by 2/28/20 coupled with another one or more negative outside months. Note that in the two prior bear markets the second negative outside month occurred 5 months after the first one. If this is repeated this would imply another negative outside month possibly during Jul 2020. Will another negative outside month, deteriorating market breath, expanding volatility and 10-mo/30-mo moving average spread contraction warn of a deep/severe market correction (10-20% decline) or possibly the start of the next bear market decline (20%-plus)?



Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com


Source: Courtesy of StockCharts.com

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