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News Analysis date published New: 
Monday, April 7, 2014 - 13:30
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Monday, April 7, 2014 - 13:30
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Monday, April 7, 2014 - 13:30

This Chart Is Signaling Weakness Ahead

Monday, April 7, 2014 - 1:30pm

The S&P 500, blue-chip Dow industrials and small-cap Russell 2000 were all fractionally higher for the week, but the tech-laden Nasdaq 100 -- which tends to lead the market both higher and lower -- was down almost 1% and led Friday's sell-off following the March jobs report. All of these major indices are negative for 2014 except for the S&P 500, which is up just 1%.

My own metric shows that investor assets most aggressively moved into industrials and health care last week, and out of financials and utilities. In last week's Market Outlook, I mentioned that investor assets most aggressively moved into the energy sector, which actually was the second consecutive week that energy attracted the most new assets.

The Energy Select Sector SPDR (NYSE: XLE) has outperformed the SPDR S&P 500 (NYSE: SPY) by 4% since March 20, as our asset flow metric tends to slightly lead relative performance. As long as assets allocated to the energy sector continue to expand, this sector outperformance is likely to continue.

Bearish Key Reversal Day Adds To Ongoing Dow Theory Warning Signal
=Since the March 10 issue, I have been pointing out that the March 7 new 2014 closing high in the Dow Jones Transportation Average was not confirmed by a corresponding new high in the Dow industrials, which created a bearish warning signal according to Dow Theory. Almost a month later, that divergence between the two indices continues to exist. The industrials actually set a new intraday all-time high early on Friday before collapsing below Thursday's low by the end of the session, closing down 160 points on the day.

This bearish key reversal day indicates that a near-term peak is in place at Friday's high in the Dow and clears the way for an additional 1.7% decline from Friday's close to 16,134, which represents the index's 50-day moving average, a minor trend proxy.

Meanwhile, the Nasdaq 100 has already collapsed by 121 points, or 3%, since we first discussed the emerging bearish chart pattern in the market-leading index in the March 24 Market Outlook. The Nasdaq 100 is now displaying a series of lower highs and lower lows on the daily chart, which is the definition of a minor downtrend.

VIX Warns the Market Decline Is Not Over
Our next chart suggests that a very complacent marketplace was a contributing factor in Friday's collapse and warns of more weakness ahead. The CBOE Volatility Index (VIX) spiked higher on Friday from an historic low of 12.6, indicating an extreme in investor complacency, or fearlessness of a U.S. stock market decline.

The red vertical highlights show that previous upward reversals in the VIX from the 12.5 level have coincided with most every near-term peak in the S&P 500 since 2013. Also note that these market declines typically lasted anywhere from one to several weeks.

This article originally appeared on ProfitableTrading.com:
Market Outlook: VIX Warns of More Weakness Ahead

John Kosar does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.