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Despite the decrease in volatility in the past weeks, the macro news flow has been relatively quiet, leaving many market participants searching for explanations.
Market weakness set in back in early 2018, and I think it’s fair to say that the rot started in the emerging markets.
In late September 2018 and then again in early October 2018 the Dow Jones Industrial Average (Dow) broke out to new highs, before capitulating along with everything else.
I have built a long-term Point and Figure chart of the Dow to eliminate the market noise. There has been a sideways pattern since early 2018 (see red circle on chart). The index broke through the pattern support in December 2018 (horizontal blue line) and bounced off December’s lows, and investors enjoyed the rally during January-February 2019.
I do not think this is the time that the investors will buy stocks aggressively. The risk is too high as the index price approaches its all-time high.
In the short term, I expect more volatility and whipsawing, and investors should wait and see how the sideways pattern will be solved. If the Dow breaks out above to new highs, they can buy more aggressively.
The stock index has been in an uptrend because as it has traded above its 45° trend line drawn from the February 2016 lows. The upside target of around 26,880 is active and it is close to the high of October 2018 when the Dow made a market top of 26,951.81.
The important trend in stocks that held in December 2018 is from the global financial crisis induced lows of March 2009. This describes the global economic recovery. We had another nice “V” shape on this 10-year uptrend.
The Dow continues to back off after completing a full recovery of the December lows. The drawback at this level should not be too surprising as it is a reasonable technical area to take some profits off the table. The index would need to break out to new highs, i.e. above last top in early October 2018, in order for the bull market to continue further.
I have put two moving averages on the Point and Figure chart (13 and 21 period simple moving average). Generally, a crossover signal of moving averages confirms a buy or sell signal registered on the Point and Figure chart itself. But in this instance, they don’t give a clear signal because the two moving averages are moving too close to one another.
At the bottom of the chart, you can see the MACD histogram that is still in red below the zero line, or its signal line. The MACD will be supportive for an upward movement of index prices if the MACD histogram crosses above its signal line and turns blue.
Financial Technical Analyst