Yamada: Dow Forming Bearish Technical Pattern

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dow descending triangle

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Famed technician Louise Yamada at LY Advisors warns that investors have been selling the rallies since the January peak, leading to a descending triangle formation on the chart, which is typically a bearish sign.

Here's some of what she told Financial Sense Newshour listeners on Saturday's podcast regarding her technical outlook...

Rallies Show Weakness

Since the January high, we see equities repeatedly approaching their 200-day moving average, and each subsequent rally appears to be weaker and reach lower highs.

“The indication is that … people are selling into that strength,” Yamada said. “If that continues, we may see a break of the lows around 23,500 or 23,439 on the Dow.”

The configuration that we’ve seen since the January peak is known as a descending triangle. The February low and the recent low on April 2nd present support, Yamada noted, right at the 200-day moving average.

This creates a straight line across the bottom and the descending line connecting the rally tops, forming the triangle pattern. Technically speaking, one can measure the back of the triangle and project the same distance down from the support line or the horizontal line, which could take us well below 21,000, if the pattern follows through on the downside.

It’s a little early to tell if we’re entering into a correction or bear market territory, but Yamada is watching the negative momentum we’re seeing on the weekly basis.

Caution Warranted Going Forward

Given these pullbacks and where markets are right now, Yamada advises exercising restraint in equity markets. With stocks making higher lowers, we’re seeing confirmation of the downtrend.

With the Fed cutting back its bond purchases and other central banks stepping back, we have additional fuel in place for rising rates.

If the economy can maintain growth under these higher interest rates, it probably won’t affect economic development and the market, but further rate increases may be problematic.

“I think that overall here, one has to be cautious on the equity market,” she said. “One has to monitor one's own portfolio and as support levels break and uptrends break, you de-risk a little and take some off the table. … We've had six interest rate rises and it's almost unheard of that the equity market doesn't take some kind of a stumble when you have that many interest rate rises in a row.”

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