Investors are wondering why the US stock markets keep going up, no matter which news hits the wire. Every sell-off seems to be bought, and traders who tried to bet against this market are probably getting very frustrated by now.
I think this market will not go down before the Dow Jones Industrials has crested 16000, but once it does we are likely to see some serious selling. Here is why.
The Dow Jones is still one of the most widely watched market benchmarks. Long term Dow charts are now starting to show a very big triple top, it is hard not to notice (click for larger image):
Three major lines to watch in this chart.
The thick blue line connects the 2000 and 2007 peaks. If the Dow climbs to 16400 then it will bump into this line again. Some investors and fund managers who watch long term charts will probably do some selling at that point.
The thick magenta line has offered support and resistance since 1998, with multiple touches throughout the years. When the market climbed above 14000 in early January it also broke out above this major resistance line for the first time since 2008. That’s why sights are now set on the upper resistance around 16400.
The thick green line is likely to become major support in the next years. More on it below.
The magenta line has also been interesting from a timing point of view. When it reached 11750, the year 2000 Dow record high, it corresponded with the stock market low in early 2009. Right now the magenta line is reaching 14200, which was the year 2007 record high. It looks like it could mark another extreme, a major high this time. If the Dow reaches 16400 (+/- 200) in August then I would hold on to my hat.
Assuming the market goes that high, what would the downside targets become? First would be the magenta line, now offering support at 14200. If that doesn’t hold, then look for support at the thick green line. This green line is using a same slope as the 2002-2007 up trend. A quick crash could take us down to 10600 this autumn, a more orderly decline would target 11750 by mid 2014.
There are also a bunch of other mathematical relationships pointing to the 16400 area as an important target:
1) 2011 high – 2009 low = 12876 – 6470 = 6406 points advance
Late 2011 low + 6406 points = 10404 + 6406 = 16810
2) 2009 low -> 2011 high = 6406 / 6470 = 99% advance
A Fibonacci 0.618 * 99% = 61.19%
Late 2011 low + 61.19% = 10404 + 6366 = 16770
3) 2007 high – 2000 high = 14198 – 11750 = 2448 points
2007 high + 2448 points = 14198 + 2448 = 16646
4) 2000 high * 1.382 (Fibonacci) = 11750 * 1.382 = 16239
5) 2009 low + 10000 points = 16470
6) 2009 low * 2.618 (Fibonacci) = 6470 * 2.618 = 16938
7) 2011 low * 1.618 (Fibonacci) = 10404 * 1.618 = 16834
8) 2000 high – 2002 low = 11750 – 7197 = 4553 points decline
2000 high + 4553 = 11750 + 4553 = 16303
9) 2012 low * 1.382 (Fibonacci) = 12035 * 1.382 = 16632
10) 1997 high * 2 = 8299 * 2 = 16598
That’s a lot of reasons to become careful if the Dow reaches 16400.
Possible ways to play this scenario. If the Dow is to peak in that price area, then it will probably get there fast rather than slowly. I would say August peak. So, I have bought some August calls last week, and if this scenario unfolds then they will go up nicely by mid August. If that’s the case, then I will sell my calls and put the money in October puts.
The chance that it will work out? Maybe some 20% chance. So, don’t bet the bank on it.
Be well,
Danny
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Why Dow 16000 will be sold
Posted by Danny on July 27, 2013
Investors are wondering why the US stock markets keep going up, no matter which news hits the wire. Every sell-off seems to be bought, and traders who tried to bet against this market are probably getting very frustrated by now.
I think this market will not go down before the Dow Jones Industrials has crested 16000, but once it does we are likely to see some serious selling. Here is why.
The Dow Jones is still one of the most widely watched market benchmarks. Long term Dow charts are now starting to show a very big triple top, it is hard not to notice (click for larger image):
Three major lines to watch in this chart.
The thick blue line connects the 2000 and 2007 peaks. If the Dow climbs to 16400 then it will bump into this line again. Some investors and fund managers who watch long term charts will probably do some selling at that point.
The thick magenta line has offered support and resistance since 1998, with multiple touches throughout the years. When the market climbed above 14000 in early January it also broke out above this major resistance line for the first time since 2008. That’s why sights are now set on the upper resistance around 16400.
The thick green line is likely to become major support in the next years. More on it below.
The magenta line has also been interesting from a timing point of view. When it reached 11750, the year 2000 Dow record high, it corresponded with the stock market low in early 2009. Right now the magenta line is reaching 14200, which was the year 2007 record high. It looks like it could mark another extreme, a major high this time. If the Dow reaches 16400 (+/- 200) in August then I would hold on to my hat.
Assuming the market goes that high, what would the downside targets become? First would be the magenta line, now offering support at 14200. If that doesn’t hold, then look for support at the thick green line. This green line is using a same slope as the 2002-2007 up trend. A quick crash could take us down to 10600 this autumn, a more orderly decline would target 11750 by mid 2014.
There are also a bunch of other mathematical relationships pointing to the 16400 area as an important target:
1) 2011 high – 2009 low = 12876 – 6470 = 6406 points advance
Late 2011 low + 6406 points = 10404 + 6406 = 16810
2) 2009 low -> 2011 high = 6406 / 6470 = 99% advance
A Fibonacci 0.618 * 99% = 61.19%
Late 2011 low + 61.19% = 10404 + 6366 = 16770
3) 2007 high – 2000 high = 14198 – 11750 = 2448 points
2007 high + 2448 points = 14198 + 2448 = 16646
4) 2000 high * 1.382 (Fibonacci) = 11750 * 1.382 = 16239
5) 2009 low + 10000 points = 16470
6) 2009 low * 2.618 (Fibonacci) = 6470 * 2.618 = 16938
7) 2011 low * 1.618 (Fibonacci) = 10404 * 1.618 = 16834
8) 2000 high – 2002 low = 11750 – 7197 = 4553 points decline
2000 high + 4553 = 11750 + 4553 = 16303
9) 2012 low * 1.382 (Fibonacci) = 12035 * 1.382 = 16632
10) 1997 high * 2 = 8299 * 2 = 16598
That’s a lot of reasons to become careful if the Dow reaches 16400.
Possible ways to play this scenario. If the Dow is to peak in that price area, then it will probably get there fast rather than slowly. I would say August peak. So, I have bought some August calls last week, and if this scenario unfolds then they will go up nicely by mid August. If that’s the case, then I will sell my calls and put the money in October puts.
The chance that it will work out? Maybe some 20% chance. So, don’t bet the bank on it.
Be well,
Danny
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Posted in Market Commentary | Tagged: Dow Jones Industrial Average, Fibonacci | 9 Comments »