Bullish Potential In The Dow?

The Dow Jones Industrial Average made a new high last week and that divergence relative to a broader index such as the S&P 500 is a sign that we have to take into serious consideration. According to our application of the Elliott wave principle, the Dow now has only two possible wave counts that are viable and in line with the rules.

The first scenario has the entire move of the index from 12471 to 14149 completed. The second possible wave count implies that only the first of the 5th wave in the Dow is complete.

Let's first take a look at the charts with the two wave scenarios:



In the charts above, you can see the entire move from the lows and the blue channel of this upward move. The yellow wave count could end at 5 (14149) and combined with the fact that S&P 500 did not make a new high, prices could start a significant downward move soon. This is depicted in the lower chart where an impulsive wave down has started in the Dow. Confirmation of this will come with the downward break of 13784.

The second possible scenario is bullish for the short-term. It implies that the Dow's wave 5 is not complete yet, but only its first sub-wave. As shown in the first chart, prices have pulled back down as low as 13937 for wave (ii) of 5. This means that another upward wave (iii) is to be expected, making new highs.

Concluding, the recent increase in volatility combined with the deep swings, could just be part of a bigger level of correction or a topping process to fool both bulls and bears. We have to be cautious as one major index had enough power to make a new high, while another didn’t. Turmoil in Europe, strength of dollar and weakness in metals are additional worrying signs that should not be ignored.

Disclosure: None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions.