Just a nice little Friday.
I think that even Charlie Dow would be proud of this one. New highs on daily and weekly charts for the Dow Jones Industrial Average. I want to give a shout out to McDonalds ($MCD) that closed today at an all-time high. I actually caught some of the traders at work feasting on McRib sandwiches at lunchtime as a celebration. I’m thinking maybe I should have had one too.
Anyway, this monster rally in equities really got going after the false move earlier this month. It’s amazing how fast these moves higher can be after failed breakdowns. Bullish divergences in RSI also helps. When momentum reverses, this is what you get.
Not everything is good news for the bulls however. Broken support from those June lows should be coming into play soon as resistance. That combined with the fast approaching 200 day moving average tells me that the Dow Industrials have their work cut out for them. $DJIA $DIA
I cannot possibly expect stocks to break through those levels like if they weren’t even there. How long does it take to break through? Does it break through at all? How many tests would it take? How low will stocks go during the correction? These are all questions that unfortunately I cannot answer. When stocks began ripping higher off that false move, this area was pretty much my target on the major indexes, S&P500 and Semiconductors included. We said that Fibonacci retracements and the former support (now resistance) were going to be a factor.
The Weekly chart, however, actually looks a bit more positive. The highs from all of that churning that took place in the Dow Industrials last year have come into play. Notice how all of that resistance has become support during the recent decline. The 200 week moving average has held as well, even though it’s still declining.
It is hard for me to have conviction in either direction here for the long term. It looks like the Dow Industrials are stuck between their 50 and 200 day (& week) moving averages: key resistance above us and important support below us. This is how I see next 6 months or so: probably more choppy sideways action within a range, like we have seen. You gotta have longs AND shorts. Pairs trades are great in this sort of environment. Pick something you like and pick something you hate. You can start there.
For the short-term, I think that the Dow clearly has some work to do. We have come a long way awfully fast. Big moves need to correct, and I can’t think of a better place for that correction to start. We have the former support, now resistance, that we have been discussing along with that 200 day moving average. I’m sure that some in the traditional media will come up with silly reasons as to why the market is selling off at these levels. I can guess that Europe and recessions and bad banks will all play a roll in those explanations.
I’m curious to see how the market reacts at these levels that are approaching fast. If it behaves similarly to how Semi’s ($SMH) have reacted this week, I would take that as a positive: Not really selling off, just kind of building up more momentum at this brick wall. What you don’t want to see if you’re a bull is a big move higher early next week that pokes its head above the 200 day moving average, media goes wild, and then reverses hard. That would not be as healthy. I’m looking forward to trading it either way.
Have a great weekend. Good football to watch. Enjoy it!