Regardless of what bombshell event unfolds, as long as we do not see a sustained break of the larger degree support zone, the Dow will likely climb into 2018, says Mike Golembesky, an Elliott Wave analyst covering U.S. indexes, volatility instruments, and forex.
Last week I wrote an article reviewing the longer term perspective on the Dow Jones Industrial Average (DJI) and had laid out my longer term outlook on the index and what my expectations were moving forward. I had noted that I was keeping an eye on the 21,084 support level and that as long as we were able to hold that level then we should be on track to seeing that target zone in the 21,971 – 22,429 zone before any kind of significant top.
On July 11, the day that article was published, the Dow saw a fairly sharp intra-day move down bottoming at the 21,283 level prior to moving back up sharply in later in the session and then gapping up higher on July 12, closing out the day at just over 21,500.
The Dow then consolidated on Thursday, July 13 and then moved higher again on Friday, July 14 hitting the 161.8 fib extension from the initial move up off of the April 18 low, finally closing the day out just shy of the 21,682 level. That is just about 1% away from the lower end of the target zone noted above.
Last week I also noted that during the Dow’s 38% run since the January 2016 lows there had been a number of bombshell news events that everyone seemed sure that would crash the market. From Brexit to Russia, the bombs were dropping, yet the markets remained unfazed. This past week we saw yet another bombshell news event hit the markets when Donald Trump Jr. made public an email about a meeting that he and other Trump campaign associates had with Russian nationals during the 2016 presidential election.
Of course, like all of the other bombshell news events during the move up off of the 2016 lows this one also turned out to be a just another dud. By the end of the trading session, the Dow had closed out almost flat on the day and then proceeded to gap higher the next morning.
The Dow is now trading some 400 points up off of the low on the day that Donald Trump Jr. made his announcement.
As the market continues to grind higher towards the ideal target zone, the patterns we are watching are still signaling that sentiment levels have not quite reached the point to cause a top in the market just yet. For it is sentiment, not some bombshell exogenous news event that will give us the top that so many have been expecting for so long.
As the Dow held well over the 21,084 support level, we continued to look higher into the end of the week. We still had what was an incomplete pattern off the April 18 low that really needed to fill out before we could reasonably consider a top in place.
Now from a purely structural standpoint and with the high that was made last week, we now have what could reasonably be considered a completed pattern in place. I would still prefer to see the ideal target zone of 21,971–22,429 hit prior to topping; any break of the 21,084 level should be viewed as an early warning sign that a top in the Dow may be in place.
Further confirmation of this top would come with a break of the 20,981 and finally the 20,553 level.
Once this larger degree top is confirmed, we can more accurately define the support zone for the next move lower but at current price levels that support comes in at the 20,063–19,311 zone. Given the structure of the second wave of the same degree, I do expect the next corrective move lower to be somewhat deep; so, these are very reasonable levels to expect to see the Dow hit prior to bottoming in its next corrective move lower.
A move down into these levels would represent a move of 8-12% and given that we have not seen a corrective move of any significance since last fall this is a relatively large move in the Dow.
So, whether the pundits will be able to assign a bombshell news event to this move to the downside or not, I cannot predict.
What I can predict is that regardless of what that event may or may not be, as long as we do not see a sustained break of the larger degree support zone the Dow will likely move higher into 2018.
See charts illustrating the wave counts on the Dow.
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