Last Week’s Volatility Could Be The Start Of A Bear Market

Last week began with a false breakout to the upside. The Dow Jones Industrial Average (.DJI) and Dow Jones Transportation Average (.DJT) opened with new all-time intraday highs of 35,091.56 and 16,170.05, respectively. Two days later these averages traded as low as 33,555.22 and 15,340.86. This range was consolidated on Thursday and Friday. The weekly charts for these two are positive but overbought.

The S&P 500 Index (.SPX) stayed below its all-time intraday high of 4,238.04, which was set on Friday, May 7. Its Wednesday low was 4,056.88, holding above its 50-week simple moving average at 4,049.94. Its weekly chart is positive but overbought.

The Nasdaq Composite (.IXIC) stayed well below its all-time intraday high of 14,211.57 on Monday and traded as low as 13,002.54 on Wednesday. This was just above its quarterly value level at 13,001. It is below its 50-day simple moving average of 13,539.89. Its weekly chart is negative.

The Russell 2000 Index (.RUT) stayed well below its all-time intraday high of 2,360.17 set back on March 15. Last Wednesday’s low was 2,132.26, which was above its annual value level at 2,120. Its weekly chart is negative.

The Philadelphia SE Semiconductor Index (.SOX) opened the week gapping below its 50-day simple moving average providing a strong warning. Wednesday’s low was 2,842.33. Its semiannual and annual value levels are 2,727.76 and 2,424.98 with a quarterly pivot at 2,974.24, and monthly risky level at 3,349.99. The quarterly pivot has been a magnet.

There were three bear market declines since the year 2000. Each were led by the Russell 2000. Dow Transports was the last to set new multiyear or bull market peaks. We are seeing similar patterns in 2021. The Russell 2000 peaked on March 15 and transports peaked on May 10.

A key reversal week is possible for the Dow 30, S&P 500 and Dow Transports. The S&P is already below its week of May 7 low of 4,128.59. Last week’s lows for Dow 30 and Dow Transports are 33,765 and 15,375, respectively.

Confirming a bear market takes time because the rally pushed the averages into inflating parabolic bubble formations. This happens when the 12-week slow stochastic readings rise above 90.00.

Stochastics scale between 00.00 and 100.00 with readings above 80.00 overbought and readings below 20.00 oversold. I say that readings above 90.00 is an “inflating parabolic bubble,” and a reading below 20.00 is “too cheap to ignore.”

Book profits when readings are above 90.00. Buy when readings are below 20.00.

Margin debt continues a record trend higher. FINRA data, shown in red below, is now above $800 billion through March. If the stock market slumps, margin-call selling is highly likely as stocks trade lower.

Let us Study the Weekly Charts:

The Dow Jones Industrial Average (34,382) still has a positive but extremely overbought weekly chart. The average is well above its five-week modified moving average at 33,705. Its 12-week slow stochastic reading is 93.48, so the average is still in an inflating parabolic bubble formation. The Dow 30 remains well above its annual, semiannual and quarterly pivots at 33,425, 32,645 and 30,546, respectively. This week’s low has been 33,555.22.

The S&P 500 Index (4,173.85) still has a positive but overbought weekly chart. The average is above its five-week modified moving average at 4,113.44. Its 12-week slow stochastic reading is 94.71, so the average is still in an inflating parabolic bubble formation. The S&P 500 remains above its annual, semiannual and quarterly pivots at 3,932, 3,785 and 3,809, respectively. This week’s low has been 4,056.88.

The Nasdaq Composite Index (13,429.98) has a negative weekly chart. The index is below its five-week modified moving average at 13,654.03. Its 12-week slow stochastic reading is declining at 77.68. The Nasdaq remains above its quarterly, semiannual and annual pivots at 13,001, 12,395 and 12,000, respectivley. This week’s low has been 13,002.54, so the quarterly pivot held.

The Dow Jones Transportation Average (15,917) still has a positive but extremely overbought weekly chart. The average is well above its five-week modified moving average at 15,091.59. Its 12-week slow stochastic reading is 96.69, which keeps the average in an inflating parabolic bubble formation. The Dow transports is well above its annual, semiannual and quarterly pivots at 14,425, 12,121 and 12,177, respectively.

The Russell 2000 Index (2,224.62) opened Monday above its five-week modified moving average at 2,251.99, then quickly faded below this key level. Given this break lower, its 12-week slow stochastic reading declined to 65.97, down from 68.22. This downgrades the weekly chart to negative. The small-cap index is above its annual, semiannual and quarterly pivots at 2,120.34, 1,880.34 and 1,855.03, respectively.

The Philadelphia SE Semiconductor Index (2,981.42) has a negative weekly chart with the SOX below its five-week modified moving average at 3,104.13. The SOX has a declining reading for its 12-week slow stochastic reading. It is now at 69.38, down from 76.30 on May 7. The SOX is above its semiannual and annual pivots at 2,727.76 and 2,424.98, but below its quarterly pivot at 2,974.24.