“Of the major indexes, the venerable Dow Jones Industrial Average pulled out the white flag Monday, signaling that an imminent reversal is now likely. Of the five major indexes, it was the only one to provide a test of the prior day’s high and fail on price and volume.
That, in and of itself, wouldn’t be enough to concern me, but when I look at the 11 major sectors, seven of the 11 also triggered the same two-bar reversal failure. Seven of 11 is worth taking note of.
A plethora of two-bar reversals in the major sectors in an extended market is a clear warning sign that a retracement is not only likely, but highly probable. In fact, only one of the 11 remains bullish with partial failures on the others as well.
As background, a bullish two-bar reversal occurs when today’s high exceeds the high of yesterday and then proceeds to close under the prior high with volume contraction and all of this comes after an extended move. The more extended the move, the better the signal. This one is quite extended.
The great thing about this reversal pattern is that, at worst, you usually get at least a pause, if not an immediate pullback, and many times the immediate retrace is what happens.
As an example, on Friday, the materials sector signaled a two-bar reversal. It was the first to do so. On Monday, volume expanded and prices slumped lower. Here’s that chart.
Monday’s sector reversals were everywhere, ranging from energy to consumer discretionary, from chips to utilities. Stocks move sectors and sectors move the markets. For this reason, unless the majority of these reversals fail, then I would expect the indexes to follow….”
If you enjoy the content at iBankCoin, please follow us on Twitter
