Is The DJIA Signaling A Repeat Of 2018 Market Declines?

by: JD Henning

A series of very similar signals showing an early repeat of 2018 patterns.

Momentum Gauge signals and values are following closely between Sept./Oct. scores and May/June scores.

Technical and price pattern behaviors are also following prior support and resistance levels on the DJIA and S&P 500 that we saw last year.

Current signals suggest we could be within a week of another significant market decline if there is any forecast reliability from the combination of these various signals.

Signals May Portend A Repeat Of 2018

Members of my service and regular readers of my weekly articles already know that the Momentum Gauge turned negative in May (Week 18) for the first time since September (Week 39) of 2018 as shown on the daily gauge chart below from May. These four negative daily signals corresponded to the recent top on the S&P 500 at the start of May shown below. These were negative momentum gauge signals last registered in September 2018.

The warnings signals in both September and May helped us avoid significant declines, but there may be more. May 2019 saw an S&P 500 decline of -6.58% and a DJIA decline of -6.69%.

Market trend opportunities can be captured in many related ETFs both leveraged and inverse depending on your risk tolerance and investment objectives. Major funds include SPDR S&P 500 ETF Trust (SPY), iShares Core S&P 500 ETF (IVV), Vanguard S&P 500 ETF (VOO), ProShares Ultra S&P 500 (SSO), ProShares UltraPro Dow30 (UDOW) and inverse funds Direxion Daily S&P 500 Bear 3X Shares (SPXS), ProShares UltraPro Short Dow30 (SDOW), ProShares UltraPro Short QQQ (SQQQ)

Examining The DJIA Technical Patterns

The DJIA chart below shows the remarkable similarities after the first major declines [A to B to C].

After the Momentum Gauges first turned negative and fell to [A] in both cases, the markets rallied to [B] both in mid-May 2019 and back in mid-October 2018. In both October and now into June, the Momentum Gauge scores have remained highly negative on the Weekly Gauge chart below, despite various market rallies.

This short rally [B] corresponded to the right shoulder of a head and shoulder bearish topping pattern on the S&P 500 charts below, that fell further to [C] on the DJIA chart above. The DJIA then rallied from support levels [C] at 24500 and moved back higher than the first rally [B] at 25800 until it arrived at [D]. We are already clearing the 25800 level today and headed for a potential repeat to [D] at 26200 level that we saw back in early November.

Our first test is to see if the index can rally to [D] at 26200. Should this pattern continue, the next move would be a decline from [D] at 26200 back down to [C] at 25800, and that will be the next major test of this signal.

If these price patterns are not similar enough, then the strength of the underlying indicators adds even more factors to consider that market fund flows and investor behavior are beginning to repeat Q4 2018. The ADX 14 composite black line is at another high around 40, last seen since November 2018 prior to the large December declines. The double-bottom RSI levels in oversold levels are remarkably similar in value and duration between October and May.

The S&P 500 has followed many of the same patterns as before while the Momentum Gauge scores continue at very negative levels.

Watch closely for repeats and similarities in these patterns as the daily Momentum Gauge scores continue to remain high negative and low positive. Perhaps you can see some additional similarities from November 2018 where the S&P 500 (yellow line) was increasing temporarily, while the positive momentum levels still remained very low at or near single digits.

These may be similar conditions revealing underlying weakness in the current rallies as we move lower from the market highs in April. We are still declining steadily on the positive momentum gauge from 125 levels in April to low double digits in early June. Use caution and consider these many growing similarities to the market declines of 2018 in your trading decisions.

All the very best!

JD Henning, PhD, MBA, CFE, CAMS

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.