No market goes straight up forever. This week’s pullback should be a welcome event for investors as a technical correction sets in.
 
The problem is that the market has already worked off its stretched technicals. And the exclusive group of strong global markets lost a big player Tuesday when China scored a massive bearish reversal.
 
I am not ready to say that a major decline is pending, but with the latest round of bad news from inside and outside the market, it does look as if the Santa Claus rally will have to wait.
 
To be sure, major moving averages as well as the long-term trendline on the Standard & Poor’s 500 are still intact (see Chart 1). After the October decline, the trendline was revised, and with the index only three days removed from all-time highs, that line is far from jeopardy.

Chart 1

Standard & Poor’s 500
 
Short-term patterns, however, are negative. The first is a three-week double top breakdown (see Chart 2).

Chart 2

Standard & Poor’s 500

A double top is simply a rally, small decline and rally back to the previous high and is sometimes called an “M” pattern. The spirit of the pattern is a failure of the trend to reach a new high, although that by itself is not a signal. If and when the index dips again, below the center low of the “M,” the pattern completes and short-term traders get a sell signal.
 
Tuesday, it seemed that would be the case as the market sold off hard at the open, thanks to the 5.4% thrashing in the Chinese stock market. Fortunately for the bulls, the market staged one of its typical intraday comebacks to trim losses and save the breakdown. Wednesday, as oil prices continued to plunge, the market fell again, and this time it did break the double top pattern to the downside.
 
What is more interesting is that the high-flying Dow Jones Transportation Average, which previously enjoyed falling oil prices, also shows signs of breaking down. Truckers seem to be tipping the scales – perhaps the market sees the battle between the good news (low energy costs) and the bad news (lack of demand) as changing for the worse.
 
Another negative signal is a bit more persistent. Junk bonds continue to fall while Treasury bonds continue to climb, and as I wrote here last week that suggests a real change in the market’s mood (see Getting Technical, “Bond Charts Show a Rising Aversion to Risk,” Dec. 3).
 
Wednesday, the iShares 20+ Year Treasury Bond exchange-traded fund scored its highest close of the year, only exceeded by the intraday, panicky high set in October as stocks seemed to be falling apart. In contrast, the SPDR Barclays High Yield Bond ETF is trading well below even the worst intraday levels of its own October low.
 
On the esoteric side, the financial news now reports the appearance of the dreaded Hindenburg Omen, a signal that often appears before major market dislocations. It is a warning, not a guarantee, however: It also appears without ensuing selloffs and, therefore, gets a bad rap from investors, mostly thanks to how it is portrayed in the media.
 
Essentially the Hindenburg Omen warns of a bifurcated, or split market. It is not unlike falling breadth indicators in that both tell us that fewer stocks are pulling their weight as the market makes new highs. It is worse, however, in that large numbers of stocks are not only absent from the rally, but they are actually setting new 52-week lows. Such a condition warns of an unstable market, and when the omen fires in a cluster we know the condition can turn into a real problem. We already have that cluster.
 
Around the world, we are seeing plenty of bad stock market movements, with serious bearish action in Russia, Saudi Arabia, Canada, Greece, and emerging markets in general. Falling oil prices have a lot to do with it. Weak economies, especially in Europe, also play a big role. For the domestic market to continue to plow higher without any real pause, if not correction, seems to be a high-risk bet.
 
                      
Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.