By Stephen W. Cox, CMT
As of this writing the hot topic among stock traders is the recent string of record highs in the Dow Jones Industrial Average. Beside the perennial fascination of new stock market highs, buyers are obliged to take an extra measure of prudence given the danger that record highs might dissolve in waves of selling.
I believe that an easy chart technique, explained below, can keep a bull in the market and generally signal the inevitable market pullbacks. In fact, this column anticipates an imminent correction of the DJIA’s record run which will soon give way to a path to new record highs.
As of this writing the DJIA’s record high is 14,563.75, printed on March 25.
The quarterly chart shows that the multi-year bullish path to the current record high is a channel made up of three parallel lines depicted in red. Note that the middle channel line connects the low on the chart with the current all-time. But most notable is the lower of the two white dashed lines. It straddles the red the channel sharing a single point on the highest red channel and similarly shares one point on the lowest. I call this white dashed line a “proxy” for the red trend channel. The point is that the white dashed line can be smoothly translated upward now through the red channel in and fixed on the current all-time where it will perforce act as technical resistance as long as the red channel is intact. The virtue of setting the white dashed line at the current all-time high is that a violation of resistance obviously signals new all-time highs to come. A move below a current all-time is evidence that a correction is brewing.
As it is, the designated the “bullish corridor,” so-called on the chart, shows that the current record high is closest to the highest red channel line – a bullish set-up, I take it.
On the other hand, my technique as applied to the monthly chart, may be hinting that although new record highs are the way of the world just now bullish momentum. The white dashed trend proxy line has been translated upward until it is technical resistance at the all-time high as before. However, it’s clear that upside momentum is waning. On this chart the action is closer to the lowest red channel than the highest red channel, a symptom of slipping upward momentum.
The prospect of a correction is compelling on the daily chart given that the DJIA is obviously drifting down to the lowest red channel on the daily chart and the prospect of a trend break is a serious development.
I calculate that a clear break of the lower red channel line would precipitate a downtrend in point value to the green “measuring stick”.
Stephen W. Cox is a Chartered Market Technician who covered the markets for Dow Jones Newswires for nearly two decades. He can be reached via email at StephenWCoxCMT@yahoo.com or on Twitter @StephenWCoxCMT.