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Major U.S. Indexes Could Be Setting Up For Excess Phase Peak

By Chris VermeulenStock MarketsJun 23, 2021 09:49AM ET
www.investing.com/analysis/major-us-indexes-could-be-over-setting-up-for-excess-phase-peak-200587809
Major U.S. Indexes Could Be Setting Up For Excess Phase Peak
By Chris Vermeulen   |  Jun 23, 2021 09:49AM ET
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Recently, I published a research article on Bitcoin suggesting there may be a bigger downside price move setting up – breaking support near $30,000 and extending the Excess Phase Peak pattern that we warned about back in November 2020. Today, my team and I wanted to alert you that the recent price rotation in the Dow Jones Industrial Average and the Transportation Index that could setup in an early stage (Phase 2) peaking formation similar to what started the recent down trend in Bitcoin.

The setup of the Excess Phase Peak pattern consists of an exuberant rally to a peak (Phase 1), followed by a moderate price correction that sets up into a sideways flagging pattern (Phase 2). If the INDU and TRAN continue to move in a sideways flagging formation after recently move moderately lower, we may start to see a new Excess Phase Peak setup in these two major indexes. This could be a warning of a much bigger breakdown in trend in the near future.

Please take a minute to review our earlier research posts related to the Excess Phase Peak setup (below) and how it related to the current market trend:

INDU Must Rally Above $35,000 To Break Away From Excess Phase Peak

The weekly INDU chart, below, highlights the five phases of the Excess Phase Peak formation and also highlights a GREEN “break-away” rally trend that could setup to end any potential Excess Phase Peak formation. If the markets resume the rally trend and the INDU rallies above $35,300 soon, we would consider this a new “break-away” rally trend – potentially ending the Excess Phase Peak pattern setup. If the INDU fails to rally above $35,300 and trades within the Phase 2 sideways flag range, then breaks downward, this type of price action would confirm the Phase 3 breakdown price trend that sets up intermediate support and the eventual Phase 4 sideways consolidation.

Remember, the phases of the Excess Phase Peak pattern are fairly easy to identify.

  • Phase 1: The rally to the ultimate peak level.
  • Phase 2: The breakdown of that peak level, setting up the initial support level and prompting a sideways price flag/pennant price channel.
  • Phase 3: The breakdown of the No. 2 sideways price channel leading to a steep decline to intermediate support – which acts as a temporary sideways bottom.
  • Phase 4: The breakdown of the intermediate support level which ultimately leads to the strongest price decline targeting the ultimate bottom in price.
  • Phase 5: Identifying the ultimate bottom/momentum base in price. This trending phase can last many months (possibly more than 12 months at time), or could be in the form of a deep “V” bottom.

Once the breakdown of the Phase 2 flagging formation is confirmed, we start to look for confirmation of the Phase 3 intermediate support level and the eventual Phase 4 breakdown of that support level.

If the INDU rallies above the recent all-time highs and breaks-away from the sideways flag ranges, then we would consider that new high as a new bullish price trend – negating the Excess Phase Peak Phase 2 setup completely. Obviously, any new all-time high/rally could eventually setup another Phase 1 peak and Phase 2 sideways flagging channel at any time in the future.

Near the lower area of this chart we've highlighted the On Balance Volume trend and how it has recently started to trend lower. We would expect any continued upside price trending to support an increasing OBV level as accumulation takes place in the markets. Failure to see the OBV level rising as price rises may suggest a “false break-away” in trend.

Dow Jones Weekly Chart.
Dow Jones Weekly Chart.

TRAN Mirroring Excess Phase Peak Flagging Setup: What's Next?

This weekly Transportation Index chart should appear very similar to the INDU chart (above). The unique similarities of these two charts, one addressing the blue-chip U.S. economy and the other addressing future U.S. transportation expectations related to economic activity, suggests traders may be shifting away from a reflation recovery after the FOMC statements last week. We are starting to see traders/investors reevaluate the capability of the U.S. economy to continue the rally trends as they have since November 2020. Could this shift in investor sentiment prompt a broader market price setup? Is it warning of an Excess Phase Peak setup in the making?

Right now, we only have confirmation of a recent all-time high peak and the start of what appears to be a sideways flagging price channel. We won't know if the Excess Phase Peak pattern is truly confirmed until we see how the current sideways flagging price channel concludes.

If it breaks downward, then we'll have confirmation of a Phase 3 Excess Phase Peak stage that will alert us that a bigger downside price trend is pending. If it breaks higher, and takes out $16,175, then we'll consider this new rally high an end of the current Phase 2 setup and expect prices to continue rallying to new highs.

Transportation Index Weekly Chart.
Transportation Index Weekly Chart.

As we move into the end of June, the end of Q2 2021, it is important to understand that market price volatility should begin to increase as earnings and forward expectations continue to flood the news wires. We are only 8+ days away from the end of June and we believe the markets are likely to trend sideways through to the end of the month – leading up to the Q2:2021 earnings calendar.

It makes sense to us that the broader markets, and investors, are searching for more clarity and reason to be bullish after such an extended price rally. Time will tell how this plays out, but one thing is certain: Q2 2021 earnings and forward expectations will likely drive trader/investor sentiment over the next 3+ weeks. Expect an increase in volatility and some potential surprises.

Consider this message an early warning if the Excess Phase Peak setup continues and confirms the Phase 3 breakdown of the current sideways flagging setup.

Major U.S. Indexes Could Be Setting Up For Excess Phase Peak
 

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Major U.S. Indexes Could Be Setting Up For Excess Phase Peak

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Comments (3)
Larry DeAngelis
Larry DeAngelis Jun 23, 2021 6:29PM ET
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Glad to see such an informative article on the downside risks in the market. Many people have not experienced a major selloff and for sure a bear market.
Don Getty
Don Getty Jun 23, 2021 6:29PM ET
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ahhh anyone who was alive last march experience a selloff - anyone 14 years old experienced a bear market in 2008/9
Rob Fordham
Rob Fordham Jun 23, 2021 6:29PM ET
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What are u talking about? Market was almost cut in half less than a year ago?!
Rob Fordham
Rob Fordham Jun 23, 2021 6:29PM ET
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Come on man these kind if comments are silly. Market dropped 50 percent in 08 and has had major drops every two years siince 2012. Heck last March it looked like amegedden so unless they have been in the market less tha. 14 months i would say ur comment is just not correct
Rob Fordham
Rob Fordham Jun 23, 2021 6:29PM ET
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Don Getty agree why do people say thing like that
Colonel Forbin
Colonel Forbin Jun 23, 2021 1:16PM ET
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Chronic Top Caller
Mac Downs
Newkentboy Jun 23, 2021 10:38AM ET
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Boy, you really are Mr. Doom and Gloom, arent you?
 
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