The $DJIA got to within 3% of all time highs yesterday. Quite the feat from being down 20% off the highs just 9 weeks ago. Credit where credit is due: Jawboning works. From the Fed’s 180 turnaround on policy to the constant carrot dangling of a supposed imminent China trade deal this rally has now pushed into the $SPX 2800-2820 zone I’ve outlined for the past couple of weeks before rejecting a bit yesterday.
So yea Dow Wow, what a magic recovery. And there’s no denying: The Fed policy reversal has been effective for now and as long as it works it works and hence new all time highs could be on the table. But no new highs have been made yet and markets are now significantly overbought and the chart patterns scream caution from the rooftops.
I’ve been pointing to steep rising wedges and readers will have seen this chart of the $DJIA I’ve been posting:
That’s a steep rising narrow wedge for the ages. This wedge pattern will break and as you can see from the action in the past year alone pattern breaks can have serious consequences.
So we find ourselves in an interesting spot: Bears need a reversal, bulls can’t afford one. Why?
Well, for bears the notion of a bull trap is getting stretched here. The bear case is not over on the larger structural charts, but clearly this rally has excelled in its one way trajectory and with prices now in some cases exceeding the December highs one has to rightly ask: What bear case? Central banks remain in full control and have once again demonstrated their awesome power in redirecting price.
But bulls have a big problem too. Consider this longer term monthly chart:
For when the daily wedge breaks lower without a new high the pattern overtly suggests a potential larger topping pattern in play with new lows potentially to come. What’s of particular interest here is that, unlike many other index charts, $DJIA never broke its 2009 bull trend. Indeed the December correction perfectly held the trend on the log chart. But if a topping pattern is to unfold then the trend line is clearly at technical risk of breaking in the months ahead.
And in the case of new lows the next major potential confluence support zone sits near 19200 on the $DJIA, the .382 fib and the 2000-2007 trend line.
Without a confirmed break lower I can’t be calling it, but I’m seeing it on the chart. While it sounds dramatic it would just send $DJIA back toward the 2016 timeframe, near the US election.
And in the context of extreme chart extensions in some $DJIA components is the risk of this happening to be ignored? I’m asking this question as I look at charts of $DJIA components such as $BA which is technically historically extended. Is it really that outlandish to propose that $BA, a key $DJIA component, would reconnect at some point with its yearly 5 EMA?
3 years in a row of massive price extensions far above the yearly 5 EMA. Indeed the stock is now on its 2nd consecutive year disconnected from it 5 EMA. And not just by a little, but by a whopping 45%.
Given the stock’s long standing history perhaps it is outlandish to presume that it won’t reconnect with its yearly 5 EMA. And if it does all of a sudden a $DJIA drop to its .382 fib does not seem that farfetched after all.
At risk of sounding super bearish here, but just looking at the very big picture here something interesting happened in 2018. $DJIA tagged its upper channel trend line for the 3rd time since 1929:
The last tag prior to that was in 2000 forming this trend line of massive market tops. 1929, 2000, and now 2018? I can’t say, but what I can say is that each time we hit this trend line bad things followed. On this longer time frame chart the .382 fib sits at 16871. Outlandish?
Well, it would only bring us back to the 2014/2015 time frame. Is that outlandish considering the fib constellation goes all the way back to the early 1930’s? No, in this context giving 3-4 years back does not seem so crazy. Perhaps what is crazy is that price has exploded higher to massively in just a few short years.
But none of this matters as long as price keeps rising relentlessly without so much of a hint of a basic technical pullback, hence it’s a theorem at best right now. For now this remains the biggest jawboning based rally of all time.
The key test will come once the daily wedge pattern breaks.
Bulls need new highs, bears need a reversal back below key moving averages. For now 2019 is an inside year with an impressive start out of the gate, but these $DJIA charts are worth watching for this rally will get tested. For now it’s Dow Wow.