Talking Numbers

These two charts could spell disaster for stocks: Yamada

Two charts could spell disaster for stocks: Yamada

Is this a pullback in the markets or are we seeing the start of something dreadfully more serious?

Legendary technician Louise Yamada, Managing Director of Louise Yamada Technical Research Advisors, has two charts of the Dow Jones Industrial Average which she believes investors should pay attention to. And, she believes they're giving sell signals.

Yamada's first chart of the Dow looks at the past seven years. "We've already seen a breach of the 2012 uptrend," says Yamada. "The Dow at least has broken its 200-day moving average. So, there's going to be more pullback."

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Along with the chart is a momentum study, which Yamada says shows a clear sell signal. "In addition to that," says Yamada, "you have the momentum in early 2014 at a lower level than the momentum was in 2013, even though the price has gone to new highs. Those are negative divergences that generally precede market declines."

However, Yamada won't use the "c" word – "crash" – just yet. "There's no way I can tell you it's a full-blown crash," says Yamada. "It's just not there. We don't see that yet."

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"I think we need to see a little bit more evidence of deterioration before we would say we were looking at something anything like what we saw in 2007," says Yamada. "But, the momentum divergences do suggest some kind of corrective action."

The second chart that Yamada says shows a sign of concern is of the Dow superimposed on a chart of margin debt. If things get worse in the market, panicked traders trying to meet their margin calls could exacerbate the problem.

"We are now at another record level of margin debt," says Yamada. "If this corrective phase became something a little bit worse, you would perhaps end up with an enormous amount of selling pressure as a result of margin calls."

To see the rest of Yamada's analysis of her charts on the Dow, watch the video above.

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