About Those Failed Breakouts in Dow and S&P

  • Posted by on October 1st, 2014 at 6:10 am

One of the things that worries me most about the US Stock market is that the last leaders are finally suggesting that a breakdown is likely coming. Since early March, the Small-cap Russell2000 is down over 9% and the Russell Micro-cap Index is down nearly 14%. Meanwhile, the Large-cap S&P500 and Dow Jones Industrial Average have held up just fine up over 4% and 3% respectively during that period. But some recent developments make me question that strength.

The first chart shows the daily bars in the S&P500 break out above the July highs, but just temporarily. Many times, failed breakouts like this come near the end of big moves. I think we can categorize this as a big move. More importantly, this gives us a nice risk/reward as we only want to be short below the July highs. This area represents former resistance in July and then support in September before breaking down. The next downside target is just above 1900 where we run into resistance from May and support in August.

9-30-2014 spx daily failed breakout asc

The next chart shows the daily bars for the Dow Jones Industrial Average. Like in the S&P500, the Dow broke out to new highs in September that simply could not hold for more than a few days. In the case of the Dow, this breakout also took us to trendline resistance and the 161.8% Fibonacci extension from the early 2014 decline. So there was even more reason to use caution up there. The risk/reward sets up in a similar fashion with the S&P500. We only want to be short below the gray shaded area which represents the highs from earlier in the summer:

9-30-2014 djia daily failed breakout asc

Right or wrong, the risk/reward up here continues to favor the bears. The smaller-cap indexes have been falling apart for 7 months while the large-cap averages have distracted participants from the true damage taking place underneath the surface in individual names. Of the nearly 7000 stocks in our universe, only 28% of them were up this quarter.

Also, 60% of the S&P500 stocks were down this quarter while 73% of stocks on the NYSE were down in Q3. So the headline, “Dow Jones Industrial Average Hits All-time High”, might sell newspapers and bait people to click on links, but underneath the surface things aren’t exactly peaches and cream.

I will say this, I like to look at the Dow 30 stocks very closely to get a good idea of what’s happening behind the scenes. I don’t see many stocks that a very bearish looking, from a structural perspective. Some have gone a little parabolic but a majority are in a very neutral position. So although I am cautious/bearish US Stocks up here, I don’t necessarily see a big crash coming, but more of a buyable dip for now that could lead to some end-of-the-year strength.

I don’t want to get ahead of myself here. I like to take things like I see them and don’t see any point in making longer-term calls since we live today and none of us have any idea what can happen in the future (contrary to popular belief). So raising cash in large-caps seems most appropriate for me here based on the weight-of-the-evidence and the tactical risk/reward opportunity detailed above.


Eagle Bay Solutions members receive weekly updates on both of these charts above, but also included in the package are longer-term timeframes with more detailed commentary. In addition, we have a Dow 30 package which includes all 30 Dow stocks on multiple timeframes. US Equities traders may also benefit from our US Sectors and Sub-sectors which includes over 60 charts on multiple timeframes with momentum and relative strength analysis.

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