Dow Industrial Average

Yesterday's nearly 200-point selloff will likely prove to be just one more meaningless blip in the context of the Dow's angsty swings since early March. It's tempting to think that something dramatic will soon happen to put an end to the tedium. Well, yes, something is bound to happen. But the Big Event could still be months away, if not considerably longer. Meanwhile, be aware that despite Wednesday's dive, the bullish pattern shown is the one we should be paying attention to -- and trading.

The chart shows how tightly impacted the stock market has become. At Wednesday's high, the Dow had achieved no net gain since early December. My hunch is that the broad averages are carving out a broad top, although strictly speaking there is no compelling reason to believe that the sideways action since early February is not a consolidation. If so, it would portend a rally to at least 18517 (p2) or to 18830 if any higher.  Does the stock market have at least one last upsurge left? The possibility is hardly farfetched, since numerous tech stocks favored by institutional investors look like they are in holding patterns, awaiting a rally signal from on high (i.e., from mahogany-paneled aeries above the 60th floor in the Battery).

Although the S&P 500 is about 17 points from a a potentially very important rally target, the Dow Industrials would need to rally 300 points -- equivalent to about 38 S&P points -- to reach a target at 18428 of equal significance. It is shown as 'p2' in the accompanying chart as a Hidden Pivot midpoint resistance on the monthly chart. The target is of particular interest because it closely coincides with a 184.04  target I'd drum-rolled in DIA. To deal with this seeming discrepancy, I'll recommend shorting DIA or the E-Mini S&Ps if and when the latter reaches its 2138.00 target; and repeating this strategy if DIA eventually goes on to achieve 184.04. I will also suggest taking home at least a small short position over the weekend even if the lower target (i.e., 2138.00) is NOT achieved. This could be made more difficult if the broad averages fall hard on Friday, so check the chat room for real-time guidance.

Refreshing as yesterday's dive may have seemed, it failed to tip the big picture in favor of bears. They could take encouragement on a further decline surpassing 17733, but keep in mind that the move would need to be uncorrected on the hourly chart once the first external low, 17925, is breached. Regardless, because the recent top occurred near a major Hidden Pivot rally target (see today's E-Mini S&P tout for further corroboration), we should remain open-minded to the possibility that a very significant decline is under way.

It would be hard to say who had a rougher time yesterday, bulls or bears. The day started out pleasantly enough for the latter, with the Dow down around 110 points at the bell. Although at that point bears might have expected any short squeeze to die quickly, it didn't. To be sure, stocks struggled to get back to unchanged, and they looked absolutely leaden when trading briefly in positive territory. By day's end, however, with the Dow off 37 points, neither the optimists nor the pessimists could have been happy -- only sellers of option straddles. More of the same today? Maybe.  But bears shouldn't get their hopes too high. Look at the weekly chart (inset) and you can see that for all the herky-jerky action of the past three months, it still looks like consolidation.  This means that if and when the Indoos break out, the move will carry to at least p2=18724 -- a 656-point flight from here. Will we be ready? It's at least theoretically possible -- provided we stay glued to the 15-minute chart day and night. Traders take note: As of around 11:34 p.m. EDT, the Indoos were a 'mechanical' buy at p=18072, stop 18023. An 18220 rally objective obtains. _______ UPDATE (May 14, 12:15 p.m. EDT): This trade worked nicely. The Dow bottomed at 12039, fully 19 points above our stop, before launching to a so-far high today of 18277.

Friday's take-no-prisoners short squeeze appeared to be tracking the pattern shown, implying more upside on Monday to a D target at 18317. The entire move was over minutes after it began, and so the only way a trader could have profited was to have been long the day before. That would have been a gutsy bet -- not only on what Friday's payroll number would be, but on how other traders would react to it. The rest of us had to extract what little satisfaction remained from the tedious, shallow oscillations that occurred over the next five-and-a-half hours.

As I've mentioned here before, the buying power in this aging bull market is not coming from bulls, but from short-covering bears. The question is, how many times can the dirtballs who control the game count on the bears to stick out their chins for another sucker punch. Notice in the accompanying chart that the Dow Industrials have gapped higher on two of the last three sessions.  The first time, the ruse worked, goosing stocks with enough power to keep them moving higher for a second consecutive day. But the second time, on Monday, stocks fell hard shortly after the gap-up opening-bar. And yesterday it was even worse: Any trader foolish enough to buy in the early minutes of the session was underwater by day's end. Fool me once...fool me twice...but fool me three times? Not likely. When the opening bell sounds on Thursday, bears are going to be extra cautious about getting sandbagged again. Absent their urgent buying power, DaBoyz will change their tactics, pulling their bids so that stocks begin the day with sellers exhausted. Even then, with supply depleted, DaBoyz are going to have a tough time coaxing stocks significantly higher. This is how bear markets begin. At the moment, it looks like DaBoyz will have to let the market fall significantly before they can count on panicky bears once again to do the heavy lifting. ______ UPDATE (11:13 a.m.): The analysis above got it just about right. The broad averages opened not with a by-now-familiar short-squeeze gap, but on a rally off criminally engineered lows that occurred in the middle of the night. The Dow has been up as much as 60 points since, but if my prediction holds, it won't get much higher.

Although the Dow finished on an upswing Friday, 38 points off its shell-shocked lows, more selling seems likely. For forecasting purposes, I'd give more weight to the trendline shown than to any Hidden Pivots supports just below.  The trendline comes in at 17474, implying a further fall of 312 points beneath Friday's settlement price. We can look for ways to get short once we've seen how stocks open on Monday, so stay close to the chat room if you're interested in the trade. Bottom-fishing opportunities will be equally enticing, since a print at the trendline would imply that bulls counting on support from two lows recorded in March will have been stopped out. ______ UPDATE: The trendline noted above is still there, but yesterday's bull stampede will have distanced it for the time being as a usable benchmark.

The massive ABCD rally pattern shown may not be pretty, but its 'D' target at 19206 still looks good enough for government work. However, a move to that height should not be regarded as a done deal, since the Dow has already had two false starts trying to push past midpoint pivots generated by Q4's impulsive thrust. The hesitation suggests at the very least that the Great Bull Run begun in March 2009 has weakened significantly since the beginning of 2015. From a trading standpoint, our best bet will be to try to leg into vertical put spreads at minor Hidden Pivot targets below 19206. This strategy implicitly acknowledges that straight directional bets with put options will be too costly, since we can't know exactly when the market will top. We are already long the Dow Industrials via some DIA call spreads we legged into a while back. Because we cashed out of most of them at a profit, the remaining position is cost-free and riskless. ________ UPDATE (March 18, 1:34 a.m. EDT): The bounce from yesterday's lows tripped a 17874 buy signal to 17961, a midpoint resistance (5-min, a=17638 on 3/13) whose decisive breach would portend more upside to 18136 over the very near-term.