I could not be more thrilled that it’s the end of the month for one reason alone: Monthly Candlestick Charts. They get me every time! It’s easy to get lost in the every day noise surrounding the market. The chart review I do heading into the first of every month is one of the most important parts of my process. It brings me home. There’s no better way I know to maintain composure and recognize trends than this monthly music and chart session!
Since June of 2017 when the S&P500 broke out above 2400, we’ve had a target of 3000. After close to a 4% rally in the S&P500 Index this month, we went out just 6 points from a new all-time high monthly close. This is not any evidence we think suggests anything has changed. To the contrary, higher prices are things we expect to see in an uptrend:
What is really interesting is what is currently happening with the Dow Jones Averages, both the Industrial & Transportation Indexes. First, let’s start with the Transports because they just went out at a new all-time monthly closing high. Our target near 11,000 was hit in January and we have traded sideways ever since. This sort of consolidation tends to resolve in the direction of the underlying trend, which in this case is obviously up:
So we want to err on the long side of Transports if we are in fact above 11,000 in the Dow Jones Transportation Average. This level represents both the 161.8% extension of the 2014-201 decline but also the 261.8% extension of the 2008-2009 sell-off. If we’ve cleared this, that would present a tremendous upside potential above 14,000. I like the risk/reward.
Now, in the Dow Jones Industrial Average, we have a bit of a thing. The market stopped rallying in January prices hit the 261.8% extension of the 2007-2009 decline. I can make a solid argument that, like the Dow Transports, it’s not a breakout until we’re above those January highs above 26,600:
I can also make a solid argument that if you take only the closing prices in the Index, which Charlie Dow himself suggested we focus most on, then we’re looking at a level in the Dow closer to 25,000. That would mean that the January breakout that couldn’t hold was a confirmed failed breakout the following month. That would put both the Dow Transportation and Industrial Averages above their key breakout levels: 11,000 and 25,000 respectively.
More good news here is that this thesis is not true if these indexes are not above those prices. So from a risk management standpoint, we have very specific levels to monitor.
Moving down the line of US Stock Market Indexes is the Nasdaq Composite, which also finished with a new all-time high monthly close. While this is certainly the case, we have been consolidating below our target near 7600 throughout 2018. This 7600 level is the equivalent risk price in the Nasdaq as 11,000 and 25,000 are to the Dow Transports and Industrials:
If we are convincingly holding above 7600 in the Nasdaq, it’s impossible for me to be bearish of stocks as an asset class. If this starts to fail, then that is a completely different story. And we will be watching for that, of course. But it has not occurred.
With respect to risk management, there has been no better source than the Mid-cap 400 Index. We have been pounding the table to stay bullish equities if we’re above 325 in this index and we have held that beautifully. New all-time high monthly close for the $MDY as well. 480 is still the next target:
A great barometer for the stock market that I always like to include in this group is J.P Morgan Chase. The argument I’ve been making the past few months is that this consolidation in $JPM is just that, a breather within an ongoing trend. The explosive move higher this month supports that thesis. We’re pennies from a new all-time high. By our work, that is not evidence of deterioration in U.S. stocks:
Here are the rest of the charts and trade ideas:
Of course, keep in mind that these are Monthly charts. We get just one new set of data points each month. It’s hard for things to change that dramatically from one month to the next, particularly in the current volatility regime. The point of this exercise is really to force us to take a step back and recognize what is actually taking place, so we can position ourselves accordingly and err in the direction of the underlying trends.
It’s one of my favorite exercises and brings me more value that most of what I do. You guys who have been reading for a long time know that very well.
Let me know what you think.