The past seven days have seen choppy trading in the major U.S. equity indices. The Dow Jones Industrial Average too was exposed to the volatility but with it the blue chip index managed to get to the milestone 14,000 mark. While ‘Dow 14K’ makes for a great headline, the question worth asking is – ‘what now?’ To get a little closer to a potential answer let’s flip through a few charts.
As a side note, for simplicity of charting I am using the DJX index, which is 1/100 of the value of the actual Dow Jones Industrial Average index.
The last time the Dow tickled the 14,000 mark it was October 2007 and the market collapse was neigh. Big round numbers such as 14,000 have a tendency to act like a magnet, but when it comes to actually meaningfully push past these price points it often takes backing and filling before ultimately heading higher, or lower for that matter.
As the Dow Jones Industrial Average approached the 13,000 mark in February 2012 it quickly corrected a few percent before pushing past the level more meaningfully. By early May the Dow had rallied 3% past the 13K mark but one month later it was again testing the 12K area. Similar market action was observed when the Dow wrestled with 12K in the first and then again in the fourth quarter of 2011.
I am expecting similar market action at the 14K mark (actually it was 14,200, which is only 1.50% away from current levels). A retracement of a few percent, followed by a meaningful breakout past 14K, which however eventually will fail back below the mark in order to consolidate for a longer period of time. Eventually, over the course of 12-24 months the Dow will then be able to get itself together to really move past 14K for a longer period of time.
On a closer-up daily chart note that the Dow Jones Industrial Average has been trading in an orderly upward sloping channel. The choppy push higher in recent days has now finally brought the index to the top of this range, where consolidation of a few percent would give it a better chance to break past the mark.
The cyclical stocks owe much thanks for pushing the market higher in recent weeks. Looking at the Morgan Stanley Cylical Index note that it too has now reached a good area of resistance, favoring a little pullback before pushing higher.
Is the Dow Jones Industrial Average reaching a significant longer-term top? It’s quite simply too early to tell, however thus far current broader market structure and price action does support higher stock prices through at least the first quarter of 2012.
The purpose of this analysis however was to focus on the near-term price action possibility of the Dow Jones Industrial Average, for which the odds favor a near-term price correction of 2% – 5% before a more meaningful push past the 14,000 area stands a better chance.
