The Dow: Headed Down?

A week after the Dow’s historic rise to break the 20000 level, the question is where it will be able to sustain this movement. Although technical methods are reporting different views, there is a strong case for anticipating some profit-taking and pullback activity in the near future. The first clue of this lies in the fact that it remained above that level for only a very short period, as shown in Figure 1.

Figure 1: The Dow Retests the 20000 Level from Above but Breaks Below

Traditionally, a breakout from such a major level of resistance is considered to have succeeded if price remains above it for a sustained amount of time, or if a retest of it from above results in a rebound higher. This has not been the case this time, which suggests that the initial breakout was temporary, at least at this point. The question is, how far down could it go?

There are several views of this. One is that this is what constitutes a Wyckoff upthrust setup, with a false breakout, which is thus now expected to head down to the lows of the previous, tight consolidation, as shown in Figure 2. This is also supported by the fact that the higher high in price was accompanied by a lower high in momentum oscillators, notably the MACD. This is classified as a reversal divergence signal. Alone, it would not be particularly alarming, but the fact that the upthrust setup is also in place increases the bearish significance of the circumstances.

The essence of the divergence signal is that a rise in price has not been confirmed by an increase in momentum. This generally signifies a slowing of the trend, although it would be precipitate to assume that it has run its course simply because of this one sign. Often, divergences lead to pauses in the trend prior to a continuation. This could well prove to be the case in this situation, as there are no particularly significant statistical resistance levels in this zone. Thus, pending further data, it appears that the case is only for a retracement at this stage, and not a collapse.

Figure 2: Wyckoff Upthrust and MACD Reversal Divergence Reveal Hidden Weakness

To continue with the question of how far this retracement could go, one could turn to the weekly chart. Here, we see very strong momentum in the price trend, as it has risen to challenge the top of the parallel channel. However, an Elliott wave count of the MACD shows that a wave 5 may well be present. A MACD wave count of that sort suggests that prices should experience a significant slowing in momentum in the near (multi-week) future. Should prices decline beyond the initial daily Wyckoff support, then the channel will be the next line of defence, with two possible levels of interest as denoted in Figure 3.

Figure 3: Wyckoff Upthrust and MACD Reversal Divergence Reveal Hidden Weakness

What about traders who wish to enter aggressively against the major trend? Bearing in mind the dictum that it is usually unwise to fight a major uptrend, it would be a better move to look for an entry close to the 20000 resistance level on a lower timeframe. In this case, the hourly chart may

prove to be of interest. The statistical Blue Box zone for a potential short, should price rise to that area and provide an appropriate trigger in accordance with traders’ rules, has been identified in Figure 4 below.

Figure 4: Hourly Dow Potential Blue Box Resistance

As always, do bear in mind that countertrend trading requires much greater niftiness than trend trading, and act accordingly.