At first glance, the Dow Jones Industrial Average looks pretty good on the charts. A relentless rising trend and market-leading performance by big stocks should be permission for investors to just enjoy the ride without using any fancy strategies.

 But traditional indicators such as the advance-decline line can mask deeper problems. When several component stocks in the Dow collapse behind the scenes, it's worth taking a closer look.

Is "collapse" too strong a word for what has happened over the past few days? That depends on your personal market opinion, but insurance giant Travelers Cos. nose-dived Tuesday to the tune of 3.8%. At its worst level, it was down 5.1%, but the real story is that the decline formed a downside breakaway gap on the chart (see Chart 1).

Chart 1

Travelers




Before that event, Travelers had already stalled and was trading sideways in a range with deteriorating technicals such as momentum and volume. When it jumped down Tuesday after reporting disappointing earnings, it left a gap, or void, on the chart where no trading took place. It was an explosive change, and it was bearish.

Also on Tuesday, aerospace and defense contractor United Technologies raised its guidance for the rest of this year, but the market focused on a second-quarter earnings miss. The stock initially rallied, but by the close it was down 1.9%. It may not look like much, but it formed a technical breakdown below both support and its 200-day moving average (see Chart 2).

Chart 2

United Technologies




The list of Dow component stocks with technical breakdowns includes General Electric and McDonald's broke down earlier this month below its rising February trendline. So did Johnson & Johnson.

 And Coca-Cola, which scored a rather substantial upside breakout last month, also gapped down. It is now trading below its former breakout level, which is not a good turn of events (see Chart 3). Technical analysts call it a breakout failure.

Chart 3

Coca-Cola



How can the Dow flirt with all-time highs while so many of its component stocks sport technical breakdowns?

 The seven stocks mentioned represent 23% of the index. But the Dow is price-weighted, which means the higher a stock's price (regardless of the company's market value), the more its movements affect the index as a whole. Of the top five stocks, pricewise, four are still in rising trends or have recent upside breakouts.

No. 3, Goldman Sachs, broke out to the upside last week after rival Citigroup (C) released good earnings news. It reported its own good earnings the next day and has not looked back since, with a net gain of more than 8%.
The point is that while we focus on big rallies in tech giants such as Microsoft and Intel there are more severe negative reactions that seem to be overlooked. Normally, when an index moves higher despite such bad news it is a bullish signal. But in this case, we have to wonder if leadership within the Dow will soon narrow to the point where the rising trend is unsustainable.
What will the tipping point be? That is impossible to know, but if the rest of earnings season provides chart action with a similar ratio in favor of breakdowns, then it is a good bet that the Dow itself has started to roll over.

For now, the trend is still to the upside. The takeaway is to watch the breadth data on big stock indexes. If they start to weaken more than they already have, then broad market price weakness is likely to follow.