Dow Jones to 12,500? That’s Where I Believe We’re Headed Next

Dow JonesThis may be a bold prediction, but it shouldn’t be overlooked: the Dow Jones Industrial Average could drop to 12,500. That’s about 20% below where it currently stands.

As you may have read in these pages before, my prediction is that the Dow Jones will retreat to halfway between its 2015 high of 18,351 and its 2009 low of 6,440. That halfway mark would be about 12,500.

Aside from my personal opinion (based on 30 years of studying market patterns), there is another indicator called “Fibonacci retracements” that now suggest the same.

Before going into detail, please look at the chart below and pay close attention to the blue lines.

Dow Jones Industrial Average Chart

Chart courtesy of www.StockCharts.com

A Fibonacci retracement is an indicator that follows the Fibonacci sequence and provides guidance on future support and resistance levels for stocks. The most common Fibonacci retracements (blue lines on the chart above) are 38%, 50%, and 62%. According to Fibonacci followers, these percentages are potential pullback levels for the previous stock market rally.

Going back to the chart, the Dow Jones showed a stellar performance between 2009 and mid-2015. Now, we are seeing a move to the downside. Again, using the low in 2009 as a bottom and the high in 2015 as the top, the Fibonacci retracements show that the Dow Jones Industrial Average could go down to as low as 11,000—the 62% retracement level suggests that.

While, I don’t rule out the Dow going to 11,000, from past experience, I know that the 50% level for Fibonacci retracements is usually where we see solid consolidations and buyers starting to come in. With this said, the Dow at 12,500 could be very possible.

I know that for many, the Dow Jones Industrial Average dropping to 12,500 may seem like a far-fetched idea, but I’ve seen even direr predictions come true.

The following chart is of the Chicago Board Options Exchange (CBOE) Dow Jones Industrial Average Volatility Index. Saying the very least, this index tracks fear on the Dow Jones. If it’s shooting higher, it means investors are turning pessimistic towards the index. This is exactly what’s happening now.

Volatility Chart

Chart courtesy of www.StockCharts.com

Remember: when investors start to panic, they run for the exit and quick. This creates a massive sell-off in a very short period.

Two Things Investors Should Know

First off, if the Dow plummets to 12,500, it will be a huge blow to the confidence of investors and the Federal Reserve. That means the Fed could come out with some major new monetary policy to support the market.

Secondly, I find it rather comical that the key stock indices like the Dow Jones Industrial Average are dropping (it’s down eight percent year-to-date) and we still hear stock advisors calling it a “great buying opportunity.” From my perspective, it’s anything but a buying opportunity, especially when you have the S&P 500 companies reporting so many consecutive quarters of negative earnings growth.

I predicted 2016 would be a terrible year for stocks and a great year for gold bullion. But admittedly, I didn’t expect it to happen so soon in the year.

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