Let’s take a look today at a pair of charts via Birinyi Research to help answer that question.
The Dow Transports have recently formed a double top:
What happens after the Transport double tops? Birinyi looks into that question, using these critieria:
• First peak is a new 52-week high
• Correction between first and second peak is at least 5%
• Duration between first and second peak is less than 120 days
• Second peak is within 2% (Plus or Minus) of first peak
How does the overall market respond following double tops in the Transports? Below is a composite chart depicting the performance of the Dow Transports and the S&P 500 following the second peak of a double top in the Transports.
click for larger graph
Source: Birinyi Research — Chart of the Day
The subsequent SPX sell off averages 5% within 50
days percent of the total move (median length: 240 days) — while the Transports can be expected to lose considerably more on average. Trannies saw declines ranging from 5.9% to 45.9%.
As the chart details, the two indices have similar patterns, although the S&P 500 declines by a lesser extent than the Transports, and the S&P 500 tends to bottom ahead of the Transports.