Fan Principle Says Down  

TECHNICAL VIEW.  The Fan Principle.  Cataloged under my Principle of Technical Analysis.  Or more simply put, how the stock market communicates if not actually talks with us.  Yep, the previously, very helpful technical indicator, the Fan Principle may be back in play.  Remember how it helped us get into the Dow Transports on the way up?  How I wrote back on March 26^th that the Transports had broken three downtrend lines drawn off last July’s top and that breaking the third downtrend line was a signal to buy?  Well, from March 26^th to the recent Dow Transports high, the index was up +14% and has been a market leader.  Well, today I see the Fan Principle as foreshadowing a market turn down not up.  This time it’s showing up not in the trannies but in the even more important Dow Industrials and S&P 500 indices.  Drawn from the lows in mid-March the Dow and S&P have now broken below three uptrend lines.  In both indices, their first uptrend lines were broken on May 20^th, their second uptrend lines were broken on June 2^nd and their third uptrend lines was broken on June 6^th or just last Friday. 

Schwartz View:  Yes, these broken trendlines are coming fast and furious, one after another, and this roughly two month uptrend was much shorter than previous downtrend in the Dow Transports, but breaking these uptrend lines should still have much validity.  Now over in the S&P Midcap 400 and S&P Smallcap 600, I only see two uptrending fan lines broken which gives additional evidence that smaller cap stocks have regained the leadership role, a point I’ve been recently stressing.  Not such rank speculation is that this leadership change is more evidence that somehow the US dollar is going to strengthen which if so will change the trend toward large and megacap stocks benefiting from strong exports.