Drilling down the Dow: A macro, to neartermed analysis

I’d like to offer this analysis of the current condition of the Dow Jones Industrial Average (DJIA) as both a market commentary, and as a Technical Analysis primer. The following is a good way for you to create your own step-by-step process to analyse any market or security. The process doesn’t have to be sophisticated and confusing. Indeed, the more straightforward you can make your analytical process, the better. I’d encourage readers who want a detailed view of this step by step stock analysis process to read my book Sideways. It was written in plain language for ordinary investors on the subject. Anyhow, on with the show.

 

The macro view

The DJIA has the longest history of any US market index. It goes back to the late 1800’s!. So we can certainly use its long termed chart to spot macro consolidations and macro bull markets. Above is the long termed historical chart of the Dow, courtesy of stockcharts.com. I’ve highlighted the last 3 macro bull markets. Important: many Technical analysts start counting the bull market from the low point that began the new uptrend. To me, this is flawed. That’s because bear markets or consolidations result in complex or multiple lows. Every consolidating market has lots of chop – as you can see on the chart.  It’s great in hindsight to identify the bottom , but in reality nobody knows which low in that that consolidation will represent the bottom of a bear. You need to see the market break out past its prior peak or its prior resistance point. That’s why I measure the bull market as starting from that breakout point, and not before that point!  I’ve market the three bull markets in pink highlighter. You will note that:

  • The 1922-1930 bull was 8 years
  • The 1950 – 1965 bull was 15 years
  • The 1982 – 2000 bull was 18 years
  • The current bull (not highlighted) began only when the DJIA broke its prior resistance, in 2013. So far, it has lasted for 5 years

Conclusion: Given that bull market cycles seem to last about a decade or longer from their breakout points, it is my belief that we are in a macro bull market cycle.

 

The mid-termed view

The mid termed analytical process issued to identify if the market is in a mid-termed bull, bear, or consolidation pattern. Using a weekly chart going back about 10 years, I applied a zig-zag line tool that searches for 7% or greater price changes, I was able to identify most of the major mid termed trends and patterns on the Dow. A correction of 7% is significant enough to warrant attention, and it does signify the potential for a mid-termed pattern. As you will note, most corrections and subsequent mid termed trend patterns, when measured trough to trough, seem to last about 6-12 months. Again, my filer is the a 7% correction–so that 6-12 month pattern is the time between a 7% or greater correction. Some are a bit shorter, some are a bit longer.

Right now, the zig-zag tool has been following a rising market. I would defer to my basic trend analysis technique (as noted on this blog, and in my book Sideways) to watch for the last significant peak to be taken out before declaring a confirmed uptrend. The Dow has to take out 26,600 or so to confirm a mid-termed uptrend. Note the red 200 day (40 week) SMA line. During consolidations you will see the market move above and below this line. If the market is in an uptrend, you need to break the last peak AND remain above the 200 day SMA on the weekly chart.  As an aside, the S&P 500 needs to take out about 2890 to confirm its mid termed trend. Of the two, the Dow is further from reaching that potential at the time of writing.

 

Conclusion: Right now, the zig-zag tool suggests a potential uptrend, and the Dow is ahead of its 200 day SMA, but the last weekly chart significant peak of 26,600 needs to be cracked to confirm we are out of the current mid termed consolidation pattern.

 

The neartermed view

You will note that I didn’t refer to any of the momentum oscillators n the macro or mid-termed charts. That’s because they are not as important as understanding the basic trend and stage of the market. Once we determine the markets overwhelming trends, we can start to refine our trading strategies. For example, a consolidating pattern needs to be swing-traded. A rising market needs to be held, and a falling market needs to be sold in an orderly fashion. If we understand that the market is consolidating (which it is now –subject to change per the above observations!) –we can buy and sell using something like my neartermed market timing system. This is a collection of readily available tools that you can use on any stock or index to identify neartermed peaks and troughs. It’s no good at all for identifying trends – but it’s very good at identifying neartermed overbought/oversold conditions. And that is exactly what you want to use in a consolidating market.

To use this system, apply the default lookback periods to Bollinger Bands (BB), stochastics, and RSI on a daily chart. When you get a touch on an upper or lower BB concurring with a hook down or up from an overbought/oversold stochastics AND RSI reading, you have a neartermed signal. As you will note on the short termed timing model as applied to the DJIA, we are quite close to seeing those conditions materialize for a neartermed ‘sell” signal.

Conclusion: We might expect a neartermed correction in the coming days.

 

 

Conclusions from the above analysis

The long termed picture suggests that we have several more years of upside left in this bull market. The mid termed picture suggests that we are consolidation within that longer termed bull market, and we should continue to believe the market will remain in that consolidation pattern until the January highs are taken out. The neartermed picture suggests that the market may be ripe to pull back in the coming days, giving little hope that a breakout from the mid-termed consolidation is imminent in the very near term.

Please note that I’m on vacation this week and will not be posting a second blog. I’ll answer comments and post a new blog upon my return next week.

8 Comments

  • Hi Keith,

    A while back you did an Elliot Wave analysis of $SPX. Would you consider redoing that(on $SPX or $INDU) in context of this theme?

    Reply
    • Hi Paul– the problem with EWT is that it isnt predictive of WHEN it ends…ie we can identify the angle of ascent and concentration in the “FANG” stocks of 2017 as a 5th wave, but we cannot yet identify the end of that wave until the last low on the seekly chart and 200 day SMA are broken–per my comment to Sally
      Bigger picture is we are in a major bull, but we could see a break per the EWT 5th wave that would represent a smaller cycle top. Either way, it hasn’t happened yet, so we wait and see.

      Reply
  • This is really good Keith, and nice and clear. Thank you.

    I’m wondering how this relates to our being in a phase 3 topping stage.

    Reply
    • Sally–only if the last low (about 2700 on the S&P 500, and 24,000 on the DJIA is broken, along with the 200 day SMA–do we have confirmation of a phase 3 top. Meanwhile, it must be considered a consolidation within an up trend.

      Reply
  • Thanks, Keith. Great job!

    Rest up. Come back and answer more calls on BNN!

    Reply
  • Hi again Keith, The BB/STO/RSI system has a nice symplicity.

    My question is about selling.
    With this method is the point to sell immediately on the simultaneous down ticks and look for something else, or wait a bit because they can go sideways ticking up and down in overbought territory?

    Reply
  • I think I figured it out. The point is that if they happen simultaneously, sell.

    Reply
    • With the short termed trading system – yes. But keep in mind, it only really gives you very near termed overbought/oversold indications–often the moves it predicts are only good for a few days. You have to decide if that is your trading horizon. I use the short termed system more to refine entry/ exits having made a primary decision to buy or sell based on trend.

      Reply

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