With this week's euphoria over yet another round number milestone in the Dow, this is one heck of a time for a very against-the-grain analysis. But as the charts below illustrate, it is not exceeding 23,000 that should be the big cause for excitement, rather it will be the breaking down below 23,000 that will be the watershed moment. As the channels and wave counts on the two charts below suggest, it will represent the first leak, or more likely burst, in the breaking of a dam.
When it comes to trading we adhere strictly to rule-based trend following, using our trend-signal line to get us long or short. For that, all we need to know is that below 22,895 on the Dow is a Sell Signal. What follows is a more detailed analysis of what could be coming our way on such a break. In a sense it has zero to do with following the Blue Line System, so feel free to skip right down to this week's trading tables.
Elliott Wave/Pattern Recognition
Big picture analysis via pattern recognition such as Elliott Wave theory is on a continuum somewhere between speculation and entertainment, but occasionally it comes together with trend analysis to present a compelling argument for a big deal trade ahead. That is what I see happening in the stock market with the Dow making new all time highs into the close Friday
Calendar year 2017 has etched a near perfect Wave 5, which itself could very well be the culmination of multiple Wave 5's stretching back at least 8, or 85 years. Since Wave 5's are the final wave in any impulse pattern, its termination on multiple levels holds special significance. If so, The Dow has tantalizing downside potential but it will take a break below established support channels to bring this bear out of hiding. How deep the downside risk is depends on how many multiple degrees of trend are ending with wave patterns going back as far as 2009, 1982, as Robert Precther is suggesting, 1932.
In the charts below I will take a journey to where Wave 5 of at least one degree, and maybe many more, will be deemed over. The breaking of 23,000 has the making of a big deal, a very big deal.
Calendar Year, 2017
The more I worked on this chart, the more stuff I embedded in it. But everything is important and the annotations below the chart should help.
On Thursday the Dow gapped up over the regression channel up from January's low. On Friday, prices gapped up over the shorter regression channel up from August. If and when price breaks below those two respective channels it's game over.
The two labeled trend channels: (1) The Wave 5 channel up from January 2017; (2) The Wave 5 trend channel up from the most recent minor low from late August, 2017.
Five waves up from August: The terminal Wave 5 may or may not be over. We won't know it's over until the minor trend channel is broken, currently at 23,000.
Five waves up from January: This Wave 5 channel gets broken on a break below 22,400. That might be the most important level on this chart.
23,000 = Where the smallest wave channel gets broken;
22,895 = Where a break of our trend-signal line triggers a Sell Signal;
22,400 = Where the Wave 5 channel up from January 2017 gets broken;
With an extended overbought market, momentum divergences and record levels of bullish sentiment, a break of the 23,000 level is just 100 points above the trend-signal reversal at 22,885. A break below that level, with us now Short, brings into view 22,400 channel support for a YTD completed EW pattern. A break of that support, below 22,400, will be game over, at least an 8-year game over.
The horizontal blue bars coming out of the right axis on the weekly chart of the Dow below are a creation of Tom Smith, developer of Advanced GET software. He calls them "Make or Break" (MOB) levels and they are derived from internal measurements within the previous impulse waves up. The concept, which I have seen in action for over 20 years, is that price will approach those MOB support levels and either find, "Make" support, or "Break" support, dropping though to the next closest MOB horizontal support level.
The shallowest downside implications of a break of 23,000 is finding support at the first MOB level, just under 20,000. But if the first level fails to contain price, the next support area is around 17,000, and if that level falls, next support comes in at 14,000. There are additional support levels even lower, based on Wave 5's going back decades, all to lower levels as far down as 8,000, but I will leave those for another time, when and if 14,000 falls.
If the Dow breaks below our trend-signal line, currently at 22,895, it will be our time to get short. SPY puts are my shorting vehicle of choice. They are liquid and leveraged as well as any other options save VXX, but without VXX's hornets' nest of manipulation. Bearish ETF's, such as SH, work as well, as do leveraged bearish ETF's like SDS and TZA. Or for the feint of heart, just go to cash and wait for the ambers to cool. There will always be another bull market, we just don't know when, or from where it will begin.
Breaking up above 23,000 on Thursday was no big deal, but breaking below 23,000 next week has a high probability of being a game changer, a big, big deal.