Stocks are at a crux now. While investor sentiment continues to be bullish, we are clearly seeing some hesitation on the charts, especially with the Dow Jones Industrial Average. The Dow Industrial, a barometer of companies that form the backbone of American business, is stalling and cannot seem to retrace back to its key 200-day moving average (MA). The failure may mean little, but it could also signal a sell-off.
In the past, I have mainly discussed the S&P 500 and its multiyear tops, which are still in place on my technical analysis. (Read “Why the S&P 500 Could Hit 1,800 Before the Year’s End.”)
The Dow Jones Industrial Average has been the weakest among the S&P 500, NASDAQ, and Russell 2000 this year and in the recent months.
The Dow Jones Transportation Average is trending higher, which helps to support the Dow Industrial at this current level. Yet when I look at the chart of the Dow Industrial, I’m concerned an upcoming correction could be in the works. Of course, this may not happen, but the potential is there.
Let me explain why the Dow Industrial could be vulnerable.
Take a look at the chart of the Dow Industrial below. I’m not sure about you, but it sends chills down my spine when I see it.
First notice the sideways channel that has been in place since mid-year. Note the tops and bottoms as reflected by the shaded gray circles.
In early August, the Dow Industrial topped. This was followed by a bottom in late August.
We saw another top in mid-September, followed by a bottom in early October.
Now notice the current top and the bearish double-top formation I drew in the chart below (as shown by the blue lines). If recent history is any indication—and this is where technical analysis comes into play—the Dow Industrial could be set for a sell-off down to the support at around 14,750, representing an adjustment of about 5.24%. While not that major, it would be a buying opportunity.
Chart courtesy of www.StockCharts.com
A downward break of the Dow Industrial to below its 50-day MA would be bearish.
Also notice the weakening relative strength and upcoming reversal in the moving average convergence/divergence (MACD) to the sell side, as was the case on two previous occasions since early August.
Now, I’m not saying you should run for the exits (that is, unless the Dow Industrial breaks below the bottom support line at around 14,750), but there looks to be a decent buying opportunity surfacing that could drive the Dow Industrial index down just over five percent.
Have some cash ready.