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A Test For The Market's Lead Scouts ?

|Includes: Consumer Discretionary Select Sector SPDR ETF (XLY)

As I've mentioned before, the leader groups that have been defying the many bearish technicals of the broad market all year long have been a prime source of good advice. About everything else has enticed one to short.  But what about the technicals of the leader groups themselves?  Well, they have generally been pretty healthy, but lately a couple of them have given me pause to worry.

The faithful Baltic Dry Index that has been the lead canary is approaching a crunch area:

It's soon going to have to snap out of this large double top foolishness or we could be in for a down market soon.  I've written a post, The Best Market Advice Is Free, about how the 140 dma (exponential for better smoothing) has proven to be an effective divider between good and bad market periods over many years. We see that the Baltic is staying above a 140/200 cross, but the cross is looking a little mangled and weak right now. It would be quickly undone by a turn south from the circled zone.

If we look at the BDI's close cousin, the Shanghai Index of China, we see a very similar condition:

It too is staying above the crossed over 140 dma, but the robust leadership out from the carnage in March is waning and threatening to put in a big double top also. As for fundamentals, the debt woes of Dubai, Greece, and a growing number of insolvencies could grip the emerging markets.

The other leader groups, retail (RLX), consumer discretionary in general (NYSEARCA:XLY), and tech (QQQQ) all are staying well above their 140 dma and are posing no double top threat. But remember that the BDI and China have tended to be earlier indicators than these other groups.

I don't consider the transports to be a leader group.  They are, in fact, a severely lagging group if you look at the TRANQ index with few rails (which are levered to commodity prices as much as economic health).  But this group is important in Dow Theory as a confirmation group to confirm the nice new highs we've had this year in the broad market. If you look at this attempted confirmation process, you see another 140 crunch zone approaching:

These transports, without the rails, are struggling in an ascending triangle formation to show a gain for the year.  If they don't soon hold the 140 dma and break the formation to the upside, it will be a troublesome nonconfirmation of the nice market move we've had this year. A break out of the formation to the downside would probably accompany the aforementioned double tops. Something to keep an eye on.

Disclosure: no positions


Disclosure: Disclosure: no positions