Despite the recent market pullback Dow Theory divergence continues as can be readily observed from the Dow indices comparison chart below. Divergence is an indication of market instability and investor uncertainty.

Clearly the Dow Industrials are in a short term bear trend. This is signified by lower highs and lower lows on the index. Will this trend become more pronounced and become a medium bear trend? It is difficult to say at this juncture. The key technical position on the Dow Transports is 6940. If this price point is violated then in all probability the market is heading significantly lower.

Comparison Dow Transport Index & Dow Industrials: Daily.

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Is this the start of a greater bear trend? At this juncture, from a technical stand point, the answer is no. While the Dow Industrials are weak the NYSE Advance/Decline line is showing no sign of such bearishness. However, should the 50 day moving average (red price) on the A/D Line cross the 100 DMA (mauve price), then I would have to reassess the technical picture.

Advance-Decline Line: Daily

Despite the apparent strength of the AD line there is one thing that is bothering me. A large number of the consumer staple bellwethers are in a bear market, in that their share prices are below their 200 day moving averages. When this important DMA becomes a position of resistance rather than support then you know a stock is in trouble. Have a look at the following charts: Coca-Cola, McDonalds, Procter & Gamble, Wal-Mart, CostCo, Pepsico, Unilever, Johnson & Johnson, Altria, Colgate Palmolive and Phillip Morris.

This behavior is not a healthy sign for the market and indicates risk is rising.

Charts courtesy of Worden Bros. TC2000 & StockCharts.Com