Dow Industrial Average

Instead of salivating over the possibility that the stock market has already topped, as we so often do, today we'll go strictly by-the-numbers.  This calls for looking at the accompanying chart as though it were a stock we really like, rather than as the sum of brazen falsehoods that have sustained the illusion of economic recovery. On that basis, we are forced to concede that the Dow looks at least somewhat likely to hit a new record peak before a bear market could begin in earnest. The 17622 target is an oldie that should be familiar to those who have followed Rick's Picks for a while.  Although  it was originally offered here as the maximum conceivable extension of the bull market, there is actually a higher target at 19438 that would be in play if the lower is exceeded by as little, perhaps, as 30 points. I've circled the recent selloff to show how insignificant it looks on a long-term chart. While some of us might like to imagine that the several 200-point down days we've seen recently are meaningfully destructive of bullish fantasies, this chart shows that only a very modest correction has indeed occurred, at least so far. Practically speaking, we'll want to short the bejeezus out of any rally that achieves our 17622 target.  We should also try our darndest to be long on the way up, since 628 points of potential profit is not to be sneezed at, even by permabears who like to think they know better. There will be numerous hooks along the way that we can use to get long with relatively little risk. This we can do by jumping on uptrending abc patterns on the lesser intraday charts. A bet on new  all-time highs would become less speculative if and when the

Traders picked yesterday to start worrying about the sickly pace of global "growth," according to news stories that purported to explain the Dow's 273-point decline. It's about time someone started worrying. In plain fact, the slowdown began more than five years ago, when the U.S. economy supposedly was emerging from The Great Recession. Now, though, the slowdown seems to be picking up steam -- kind of like a locomotive running off the rails in reverse.  Industrial output in Germany has become particularly worrisome, down 4% in August to mark the steepest drop in more than five years. That's shocking news for anyone who hasn't been paying attention to the European Union's slow-motion crack-up. Evidently, investors have been too busy buying Spanish bonds hand-over-fist to notice. So where to next for the Indoos? There's a Hidden Pivot support at 16628 where we should look for a tradable bounce (see inset), although I would counsel you with an old trading adage:  When you try to catch a falling piano, wait till it has bounced a few times first.  If the support gives way easily you can put aside Hidden Pivot dynamics and simply look for the Dow to grope its way down to the August 7 low at 16334 in search of traction.

I've reproduced the DJIA monthly chart to remind Rick's Picks followers of a 17622 target that I first advertised here about a year ago, when the Indoos were trading more than 2000 points lower. Although there are other rally projections that can be derived from patterns of larger degree, this one has the virtue of offering clarity, if not necesarily an ironclad guarantee of a bull market top. The target lies 356 points above Thursday's settlement price, implying there will be a rich opportunity for bulls and bears alike to profit on the long side ahead of any shorting you might be inspired to attempt when 17622 is reached. The target could take a couple of days to reach, or a week or even longer. But my gut feeling is that it will be reached, especially if the S&P 500 cash index blows past a key target at 2028.

When a stock or an index takes a wicked dive, it often occurs after the particular vehicle has marginally exceeded some prior, significant peak. 'Everyone' turns bullish on the breakout, including bears prepared to cover on a hair-trigger signal, and that sets up the haymaker. Notice in the accompanying chart, however, that the record high recorded by the Dow on September 4 has led to no such plunge.  The high exceeded July's record peak by 10 points, and that should have been enough to get bulls' -- and bears' -- juices flowing.  Instead, we've seen only a moderate pullback since then, leaving bears very much on the hook.  We could still see a collapse from these levels, particularly if there is unsettling news. But for the time being, bears shouldn't get their hopes too high. We are short the Diamonds via some out-of-the-money put options just in case, but we may have to reshort if DIA breaks out to new highs. (Note: This tout is being written before Thursday's close, since I will be away from the office later today.)

The Industrial Average finished on the high of the day, at 16839, having completed a very precise 0.618 retracement of the steep decline that occurred between late July and August 8. I said we'd try to get short there if and when that Fibonacci level was reached, and so we did.  The trade is detailed in my DIA update elsewhere in the Touts section. Suffice it to say, the very tight stop-loss I advised has not left much room for error. Nor should we, since we don't pretend to have a crystal ball, nor can anyone predict with certainty that the Dow will not eventually reach 100,000. The apparent cause of the rally was diagnosed brilliantly by David Stockman in an essay titled 'It's Jackson Hole, Stupid!'  This think-piece should be a must-read for investors, since it explains the herd mentality right now as well as anything I've come across.

The chart shows how Mr. Market set up the haymaker: a double top followed by a swoon that left bears scrambling for cover on Tuesday.  Stocks opened that day on a nasty gap that would not merely have fooled bulls, but panicked shorts as well.  A weak rally followed, then a sharp pullback into day's end.  You'd think bears might have sat back and enjoyed it, but no. The next day, they allowed themselves to get sucker-punched with yet another short-squeeze on the opening bar. By day three, bulls and bears had both figured out where things were heade and pulled their bids.  Expect the downtrend to exhaust itself on very low volume today, setting up a new short-squeeze that could start the process all over again.

Somewhat beneath the old, 17622 target I've been using for a year to keep myself honest no matter how I felt about the market, there was another Hidden Pivot worth remembering at 17209. It is shown in the chart, and it displays with sufficient clarity that we should perhaps be vexed by its failure to work perfectly. Still, the 58-point shortfall amounts to just 0.3% percent -- close enough, probably, for the target to be considered fulfilled.  Moreover, need we remind ourselves that it is in the nature of a bull market about to fail that its final gasp should fall just shy of a major Hidden Pivot rally target?  So there you have it -- the case, if not for an incipient bear market, then at least a good reason to take each and every minor, downtrending abc seriously from here on out. And so we shall, at least until such time as 17209 is decisively exceeded, putting 17622 in our crosshairs.

In recent months, I have clung stubbornly to the idea that the stock market would have one last hurrah before collapsing to usher in a Second Great Depression that has long seemed unavoidable. I'd have to concede that it felt good to be among the few permabears who happened to be looking for sharp rally -- in this case, to Dow 17622, nearly 1200 points above Thursday's settlement.  However, it is days like yesterday that should prompt one to re-examine such assumptions. To be sure, even though the Dow was down 216 points at low ebb, the selloff did only moderate technical damage. As you can see in the accompanying chart, the current slide has yet to exceed either of two distinctive prior lows recorded, respectively, on May 7 (16519) and April 28 (16479). A breach of one or both would make the Industrial Average 'bearishly impulsive', reviving a threat that last surfaced a month ago when the Dow sold off 616 points after hitting a marginal new all-time high on April 4. Scary as the decline seemed at the time, the blue chip average reversed direction sharply, rallying to a series of new record highs that culminated with Tuesday's 16735. It should be noted that each of these new highs occurred on decreasing volume, a red flag for technicians. But do we now infer that the bull is dead? I'm going leave that question open, although odds of a 'yes' answer would increase somewhat if in the days ahead the Dow breaches the key lows noted above.  As a practical matter, I plan to take both sides of the bet. I already swung and (quite possibly) missed with the purchase on Wednesday of 40 out-of-the-money call options in DIA for 0.08 apiece.  Now, I'll be looking to get short

The yardage gained so far this week is small, but it has been just enough to put the Dow within the 'magnetic field' of the 17209 target shown. This is not a scientific observation, just a gut feeling that you can confirm by looking at the chart yourself. Traders should maintain a bullish bias until such time as 17209 is reached, but you should also plan to short there aggressively at that time. The target is probably too well advertised to expect a dead-center bullseye, but I strongly doubt the Indoos will be able to avoid making a tradable top very near it.