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This Usually Spells Trouble for the Stock Market (It’s Happening Now)

“Even short term, diverging trends can signal an unhealthy market”

by Bob Stokes
Updated: April 13, 2022

If you've been an investor for any appreciable length of time, no doubt you've noticed that all of the stock market indexes usually move in unison.

For example, when the Dow Industrials rally, the S&P 500 and NASDAQ usually do so too -- the same applies during a broad downtrend.

As our April 8 U.S. Short Term Update noted:

Think of the final days of [the big down wave] in March 2009, at the end of the Dow's 54% decline from October 2007. Nearly every stock index made a low within days of March 9, 2009--blue chips, technology, small caps, transports, secondary stock indexes--and all rallied in unison thereafter.

However, when stock indexes begin to diverge, this is usually a sign that the existing trend is about to reverse.

As a case in point, let's return to that 2007-2009 bear market that was just mentioned. However, this time, let's look at its beginning.

This chart and commentary are from the Sept. 26, 2007 U.S. Short Term Update:

MarketNearTerm2007

Here's the structure in the DJIA, which is the strongest of the blue-chip indexes. The pattern is similar in the S&P with the main difference being that the S&P did not push above last week's high... leaving a short-term inter-market bearish divergence.

About two weeks after that analysis, the Dow and S&P topped -- kicking off a nearly year-and-a-half bear market.

Let's return to 2022 and additional commentary from the April 8 U.S. Short Term Update:

Even short term, diverging trends can signal an unhealthy market, depending of course on context.

Short term trends are diverging.

The very next trading (April 11), the Dow Industrials tumbled more than 400 points. And, as of this intraday writing on April 12, the Dow is down about 145 points.

As you might imagine, the Elliott wave model puts the recent, short-term diverging trends into context.

Learn if those 400- and 145-point drops are part of a short-term correction or the start of a prolonged downtrend.

You can do so by reading the latest U.S. Short Term Update, which is part of our flagship Financial Forecast Service.

Just follow the link below to get started.

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