Tracing Out a Head-and-Shoulders Value Line

As the financial markets charge into another week of trading, the US stock market keeps staking its flag at ever-higher levels…sort of.

The Dow Jones Industrial Average ended last week at 10,270 a new 13-month high for this high-profile index. But most of the broader failed to keep pace. In fact, they slumped lower! Options expert, Jay Shartsis, founder of the Shartsis Options Alert in New York, calls this development a “very serious negative divergence.”

Value Line/Dow Divergence

“The new Dow highs have not been confirmed by the widely-based Value Line (over 2300 stocks),” Shartsis points out, “and divergences between these two indices have marked important turning points in the market in past years. This divergence, in my opinion, trumps the still bullish sentiment data and calls for a stock thrashing dead ahead.

“Traders should also note that a head-and-shoulders top is building on the Value Line Index,” Shartsis continues, “with the right shoulder top lower than that of the left – an extra bearish element. At the current 2,138, the Value Line is about 4% from a new high and it doesn’t look like it is headed back to that level any time soon.”

Armchair technical analysts might also find it intriguing that the NYSE Financials Index (which has been leading the stock market since last March) is tracing out a head-and-shoulders formation that closely resembles the Value Line’s. These bearish auguries do not guarantee that the stock market will retreat, of course, but they do provide some modest cause for concern.