Is the Dow Jones Industrial Average Topping Out?
With the decline in stocks this week, it appears as if the Dow Jones Industrial Average has completed a double top formation. This means that the Dow hit a certain point during its ascent, then corrected, then rose again, but failed to rise above the first peak. The implication from a technical standpoint is that investors are intent on selling at that level, and that new buying has abated so that it is not sufficient enough to drive prices higher. This is bearish, and it suggests to me that we may be seeing a top in the Dow and in stocks more generally.
There are many other signals that this is the case as well. First, we are seeing declines in economically sensitive assets, most notably base metals such as copper. Copper, sometimes referred to as “Dr. Copper,” is used in industrial goods ubiquitously, and a decline in copper prices signals a decline in demand for industrial goods. While copper has risen in the last few trading sessions, it has failed to breach the psychologically important level of $3 per pound, and it looks like it is going to break lower.
Second, we are seeing the shares of riskier companies, notably those in the Nasdaq 100, sell off more aggressively than shares of other large-cap companies. While the Nasdaq 100, unlike the Dow, made a new high after its January high, it has been selling off more aggressively. Over the past month, the Dow is flat, but the Nasdaq 100 is down nearly 4 percent.