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Has The Sell Off Started Led By The Dow?

|Includes: SPDR Dow Jones Industrial Average ETF (DIA)

While Apple (aapl) shares have lead the Nasdaq to a 20.6% gain year to date, the rest of the broader market has not been as strong. Now low volatility and high prices make the market environment ripe for bears to take shots on the short side using various option strategies that limit risk but allow room for opportunity. The only problem is deciding when to pull the trigger.

One way to hear the "message of the market" is to observe the different indices to compare the price action among them. When one index begins to move before another, we might be observing a glimpse of something that is starting to happen. While not always a guarantee, most of the major changes in direction are lead by a single index later to be followed by the rest. If the divergence is not caused by a short term lag or single stock price divergence, the leading index should be observed and respected as an indication of a change in sentiment or trend.

Therefore, we come to the following chart of the S&P 500 futures daily charts compared to the Dow Jones futures daily chart below. Observable in the charts is that the Dow is starting to return to its mean ahead of the broader S&P500. For the past week, the S&P is about flat while the Dow is already down about 0.7%. These indices should be watched and the relationship should continue to be observed as they might be trying to tell us that momentum is shifting.

sp vs dow

After a fast run up, we would expect sideways distribution in prices for some time before a correction in prices. The market typically has 4 stages: Rise, Top distribition, Correction, Bottom distribution. In this case, while sudden correction can happen unannounced, we may be entering a sideways phase where prices oscillate in a range until a new catalyst takes to market higher or lower.

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*Not a recommendation to buy or sell. Options and futures are risky and can cause substantial financial loss. Options and Futures are not appropriate for every investor. Past performance is not indicative of future results. Speak to your registered financial representative before investing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.