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Chart Of The Day: Dow Jones To Re-Test Highs In The Medium Term

By Investing.com (Pinchas Cohen/Investing.com)Stock MarketsJun 11, 2020 10:24AM ET
www.investing.com/analysis/chart-of-the-day-dow-jones-to-retest-highs-in-the-medium-term-200527427
Chart Of The Day: Dow Jones To Re-Test Highs In The Medium Term
By Investing.com (Pinchas Cohen/Investing.com)   |  Jun 11, 2020 10:24AM ET
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We have been consistently bearish about equity markets for some time, because of unjustified valuations against the backdrop of the worst economic data in 70 years, and warnings from the Fed – which were repeated yesterday – the IMF, the World Bank and a slew of money managers. Nevertheless, stocks have seen the greatest rally in years, despite these fundamentals and some technicals.

Perhaps today's broad sell-offs are due also to a fresh wave of COVID-19 infections in the US as lockdowns continue to loosen. However, the strongest rally in years has also taken place during the worst of the pandemic.

By the time deaths per million peaked in the US at 8.15 on April 22, the Dow Jones Industrial Average had exploded higher by almost 29% from its March 23 low, when the mortality rate was just 0.17.

US COVID-19 Deaths
US COVID-19 Deaths

Yesterday, the Dow Jones completed its first back-to-back decline in nearly a month. Let’s remember, however, that the last two-day selloff was followed by a rally, even though it followed a bearish pattern – a small H&S top within another bearish pattern – a rising wedge. Both patterns failed when market dynamics flipped, leading to a short squeeze and encouraging the bulls. Therefore, we are now making a bullish call for the short- to medium-term, in which we see prices eventually retesting February’s all-time highs. 

Dow Daily
Dow Daily

However, since the last two-day selloff that ended Mar 13, stocks have surged by nearly 21%, blowing out two innately bullish patterns and cutting through the 200-DMA, like it wasn’t even there, in the process. So, for now, a pullback is in order, as investors lock in profits and wait for a signal on where to go from here. 

The June 5 upside gap – the third gap up in this move that has taken place since the May 14 low – is concerning. Think of it as a last, desperate effort to continue higher. The problem is that when demand dries up, there is no support left, leaving traders hanging, ahead of any selling. This might be a setup for an Island Reversal, complete with a downside gap. However, if there is no falling gap, and the index does display some accumulation above the failed rising wedge, convergence at this point with the 200 DMA will create a technical pressure point and we would expect the rally to continue.

The upside breakout of the rising wedge that we have seen has taken place on the back of growing volume. Notice how volume has rounded out, gradually declining from those initial heavy levels until bottoming out. Now, with this recent breakout, volume is rising again. Also, the 20 DMA for volume has been breached for the first time in this recent leg. Similarly, the Advance-Decline also jumped along with the price breakout, and has declined in line with the current selloff.

On the other side, RSI is topping out after reaching an extremely overbought 86.6 and the ROC has provided a negative divergence. However, neither momentum indicator has yet broken below uptrend lines or previous troughs. Therefore, if the price finds support above the falling wedge, and these indicators remain above their previous lows, traders might see this as a point at which to enter a long position.

Hourly Dow Jones Chart
Hourly Dow Jones Chart

Either way, we expect at least a short-term pullback, after the hourly chart completed an hourly H&S top, which has proven itself with a return move after the penetration didn't even last the hour

Trading Strategies

  • Conservative traders should wait for support confirmation by the failed rising wedge, with a new high above the June 8 price, then wait for a pullback.
  • Moderate traders may be content with risking a long position with a base above the rising wedge.
  • Aggressive traders will probably enter a contrarian short, depending on the hourly chart and the market’s ripeness for correction.

Trade Sample – Aggressive, Contrarian Short 

  • Entry: 27,000
  • Stop-Loss: 27,200 
  • Risk: 200 points
  • Target: 26,400
  • Reward: 600 points
  • Risk:Reward Ratio: 1:3
Chart Of The Day: Dow Jones To Re-Test Highs In The Medium Term
 

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Chart Of The Day: Dow Jones To Re-Test Highs In The Medium Term

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Comments (8)
Nguyễn Diệu
Nguyễn Diệu Jun 14, 2020 9:28AM ET
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you bicode
Irvin Mermelstein
Irvin Mermelstein Jun 11, 2020 7:16PM ET
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There were two minicrashes before the Great Crash of September-October 1929. The first was in March when banks added liquidity to the markets so investors could keep buying stocks with cheap money. The buying frenzy resumed until late September, when the market experienced the the first leg of a bear market until July 1932. The euphoria that has ruled the market recently had precedents in 2000 and 1929. First, the market will give back the gains since the March lows.
Gulo Hemuls
Gulo Hemuls Jun 11, 2020 5:35PM ET
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This didn't age well...
Jan Skilbrei
Jan Skilbrei Jun 11, 2020 4:02PM ET
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its interesting, but when you posted the article, dDow was already deep inside your wedge, anyhow, your articles always very relevant
Chris Poulos
Chris Poulos Jun 11, 2020 3:39PM ET
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eventually the 'articles' on this site will be contained in a 1 inch square in the middle of the screen and the rest of the space will be ads ....  oops, i shouldnt give them any ideas.
Allison Taylor
Allison Taylor Jun 11, 2020 3:32PM ET
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Bullish call for short- medium term?
Allison Taylor
Allison Taylor Jun 11, 2020 3:32PM ET
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You must be joking right?
Jonathan Sutton
Jonathan Sutton Jun 11, 2020 2:58PM ET
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Ooooff this is aging poorly
Daniel Ng
Daniel Ng Jun 11, 2020 10:39AM ET
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What line?
Pinchas Cohen
Pinchas Cohen Jun 11, 2020 10:39AM ET
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Sorry, Daniel, I don't understand your question.
 
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