Many chartists are currently harping about the big possibility that the US market is due for a big correction as they already see the three major indices; DJIA, Nasdaq & S&P 500, forming the bearish head & shoulders formation, a possible signal that the bear markets are a-comin’.

But before we go on to confirm what the others are saying, we have to step back and take a look again at the three major indices to see if indeed they are due for a bear market by using one of the Dow Theory tenets.  One of the tenets that is perfect for this situation is that the averages must confirm each other.  This means that no important bull or bear market signal could take place unless the averages gave the same signal, therefore confirming one another.

Keeping that in mind, let’s take a look at how the DJIA & the broader based S&P 500 are doing.

As we see on the charts, the DJIA has a neckline that is drawn slightly downwards.  At the same time, the right shoulder’s peak is lower than the left shoulder, thus somewhat confirming that there is weakness in this index.

The S&P 500 also shows the same characteristics.  It has a right shoulder forming at the moment and the peak is lower than the left shoulder.  Its neckline is also very similar to how the DJIA is formed, it is drawn slightly downward, therefore showing us a perceived weakness prevailing in both indices.

But wait a minute!  Something is off here as only these two indices are the ones showing the similarities.  The Nasdaq is a bit different.

Nasdaq is showing us a neckline that is drawn slightly upwards while at the same time, the supposed right shoulder has already created a peak that is already higher than the left shoulder.  Should this be a sign of weakness, then the right shoulder’s peak shouldn’t be higher but lower.

Due to the difference we pointed out, we already could not confirm that all the indices are showing the same signal.  The tenet said that in order for a bull market to be confirmed, the averages must exceed a previous secondary peak.  In this case, one index is not showing that.  When the averages diverge from one another, we have to assume that the prior trend is still intact.

To put things in a simpler perspective, we can not confirm any pattern until certain trendlines are broken.  There is always a possibility that perceived formations may turn into something different and those could give us different implications.  In short, many perceive that the three indices are giving us bearish head & shoulder patterns but we can’t confirm that until the necklines are broken convincingly.

However, that’s only me talking as I try to understand what is happening based from what we understand from the Dow Theory.  If you feel that our observation here is erroneous, please tell us why you think otherwise.