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Dow Jones Transport Index may double top like the crash of 1987
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Bearish Technical Sign
Guy Adami and Dennis Gartman of Fast Money have noticed a potential bearish technical indicator on the Dow Jones Transports Index. While reading stock market blogs this weekend, I came across this same troublesome pattern and will be watching it very closely this week.
Double Top in the Making?
On the chart of the Dow Jones Transports there is a potential double top setting up on the daily chart. The case for the double top pattern is strengthened by the fact that the index has failed to make a higher high since September 15th, and volume on the downside has been strong than volume during the rallies.
Gartman believes there could be a severe correction in the very near future. He thinks stocks could drop 10-15% from the highs, and recommends short positions.
Eerie Similarity to Chart of 1987
One very important observation not noted in their analysis is the similarity between the Dow Transports 2009 chart and that of the Nasdaq in 1987. They are strikingly similar with rising wedge patterns being carved out over both of the years. The breakdown from the wedge was so significant in 1987 that the markets crashed.
A Double Bottom Could be in the Works
The crash of 1987 brought a greater than 30% drop in the Nasdaq, and eliminated nearly a years' worth of gains in just a week. A drop of this magnitude would take the index below the 3,000 level and the Dow Jones back to the 7,000 level, or near the March 2009 lows.
A Crash Could be a Week Away
A crash may or may not happen, but a severe correction could be in the works. If the Dow Jones Transports continue to mirror the chart of 1987, a crash or severe correction could come as early as October 30, 2009 or the first week of November. A key level to watch is for a close below the 3,700 level which would confirm a lower low on the daily chart, and would likely cause the Dow Jones and S&P 500 to break down out their rising wedge patterns.
Bear Market Rally is Coming to an End
The markets are way overbought, technology stocks such as Amazon and Apple are trading at inflated levels once again, and fear has once again entered the market. Combinations such as these bring about severe corrections and even market crashes. Can the market really crash again? Of course it can, but are you willing to hold on to your long positions to find out? This is the time to be scared. Don't be fooled by the bulls and ignore the warning signs that this bear market rally is coming to an end.
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