In August 2013 I posted an article with long term price projections for the Dow Industrials based on a remarkable price symmetry since the 1932 depression lows: The case for Dow 32000
The article called for a major peak near 32000 or 19410 by late 2016 or early 2017. So here we are in late 2016 and the Dow has just reached that minimum target of 19400 last week. This is the perfect time to update those projection charts and have a little look what could be up next.
In my article I mentioned 3 conditions that would need to be met for the Dow 32k scenario to remain in play. The market was just having a bit of a pullback after climbing above 15k for the first time, and there was plenty of talk that the top was in and the market would crash. This were the 3 conditions:
1) The current correction has to be shallow and cannot venture too far below 14000 before recovering.
2) The green overhead resistance line, connecting the 2000 and 2007 highs, will have to be overcome and left behind. That’s not going to be an easy feat. But with all the ongoing QE, who knows?
3) This breakout above 17000 would have to come by summer 2014.
The first condition was met easily as the pullback was short and shallow with a bottom near 14700 before climbing to new records in 2014 and 2015.
The third condition was also met as the Dow nicely climbed above 17000 in the summer of 2014.
But the second condition, leaving the green overhead resistance behind, did not pan out as can be seen in this chart:
And that’s how we did not get to 32k, but we have reached the lower peak target of 19400. Does that mean the top is now in and we can bet on a crash? Well, not so quick. The possibility exists that the market is starting its final ascent and may reach the 30k-32k in an 8 to 12 month blow-off peak. We still don’t see massive investor euphoria and if the Dow climbs to the upper bound of its trend channel since the 2009 lows (dashed grey lines) then it could get there. The pink ellipse shows the projected target area in this scenario.
I will go to S&P 500 charts to study how such a final surge might play out. This is the current situation with major trend lines drawn in:
The S&P is clearing one of the last overhead hurdles near 2250 (green line) and if it decisively breaks through that level then the door will be open for a climb to the upper bound of its trend channel since 2009 (blue lines). In fact, neither the Brexit nor the US election fears pulled the market back to the lower trend long term trend line (blue), which supports the case for such a surge. The S&P is already following a steeper rate of advance (given by the dashed grey line) since early 2016. If it keeps this up for another 8 to 12 months the S&P will be in the 2600-3000 zone. This is the same rate of change it kept going for more than 3 years in 2012-14. If it keeps it up for another year then the S&P would be in the 3000-3200 area. Both target zones are shown with pink circles in the chart and appear doable.
This analysis helps us to see what it will take for this scenario to stay on the table. S&P will need to break above the green line quickly and then go on to 2500-2600 fairly soon, probably before summer 2017. Then a final autumn autumn moonshot could take it to near 3000, which would become an obvious attractor at some point.
We can also see what would invalidate this setup. Any decline below 2000 in 2017 would tell us the long term advance since 2009 has ended and that would definitely take the quick surge scenario off the table. Any sustained drop below the dashed grey line, currently near 2100, would already suggest this scenario is not making it. So, that are the lines in the sand that I am going to watch carefully.
If we do get a surge to 2600+ next year then it is likely to be followed by a steep decline in 2018-21. This is what would become my base scenario after such a blow-off peak:
Major long term support will be in the 1500-1700 area in the early 2020s, so that would become an important target if there is a crash or bear market.
What are the odds of this coming true? I think there is currently about 20% chance to get this kind of runaway market in 2017, and the odds would go to 40% if the S&P gets above 2300 quickly and keeps climbing in January – February.
Let’s finish with a look at the shorter term Nasdaq chart:
New records with the Nasdaq breaking above 5400 after earlier hesitation at that level. All indicators are pointing up with further room to rise. No signs of a peak. All we can do is go with the flow.