Dow May Sink Lower Then Rally to 23,500-24,000 in 2018

08/24/2017 12:00 pm EST

Focus: STOCKS

Michael Golembesky

Analyst, ElliottWaveTrader

The Dow will still likely see lower levels into the fall then it could be followed by another strong rally that should take us to the 23,500-24,000 level in 2018, says Mike Golembesky, an Elliott Wave analyst covering U.S. indexes, volatility instruments, and forex.

The Dow Jones Industrial Average (DJI) has moved down close to 600 points off of the high that was struck on August 8 into August 21 lows. Now in percentage terms, this 600-point move is quite small, representing a move of just 2.6%. In fact, this week the Dow was only down some 1.2% off the August 8 high. Furthermore, the move down into the August 21 lows has still not even breached the top of the upper support zone.  

The Dow has certainly been trending down over the past two weeks. It does still have more work to do before we can confirm that a larger degree top in place.

Anecdotal and other sentiment indications

While the Dow dropped a total of only 1.5% from the initial August 8 high into the August 11 low, the CBOE Volatility Index (VIX) almost doubled during the initial move down off the highs. It then climbed  up 44% on the second move down on the Dow from the August 16 high into the August 21 lows. Furthermore, the iPath S&P 500 VIX ST Futures ETN (VXX) moved up almost 29% during this initial drop and 12% during the secondary drop.

Given the historically low levels that the VIX had seen over the past several months, a “reset” in volatility was certainly due. The reaction in the volatility markets was certainly well out of proportion to what we would typically expect to see with such a small drop in the equity markets. 

Since those highs both the VIX and VXX have moved significantly lower but are still trading up from the lows set prior to the start of the move lower in the equity markets.

I am still expecting more volatility in the markets in the coming weeks and months. This expectation would be supportive of the Dow moving lower prior to making new highs once again. However, I remain cautious in this expectation until the Dow is able to at least break back under the August 21 low.

Price pattern sentiment indications and upcoming expectations

Last week I noted that I would be watching the smaller degree support zone for clues as to whether the Dow had indeed made a larger degree top. That support zone was, and still is, sitting at the 21,523 -21,250. A break of this level would thus signal the start of a corrective move down towards the 20,000 area. 

On August 21,  the Dow hit a low of 21,600 just 77 points over the upper end of the support zone. The Dow has now bounced higher in what is now counting best as a corrective pattern off the August 8 highs.

The move up from the 21,600 low was fairly sharp but as of the close on August 22 is still counting best as only being a corrective three wave move. If that move follows through in an impulsive 5 wave pattern and is followed by a corrective three wave retracement, then it would be the initial signal that the Dow has indeed bottomed in the smaller degree fourth wave as indicated in white on the charts below. 

Under this white case, the Dow will likely see another move over the August 8 high prior to topping. This move could potentially take the Dow into the mid-22,000s prior to topping in the larger degree third wave.

Alternatively, if the Dow breaks back below the August 21 low, it would give us the initial signal that this has indeed put in a larger degree top as indicated by the green count on the charts. 

In either of these two cases, the Dow will still likely see lower levels into the fall of this year. As I have noted in my previous articles, these lower levels should then be followed by another strong rally that should take us into 2018 and the 23,500-24,000 level.

The Dow has been trading down over the past several weeks; until it can break back under the August 21 low I still cannot count it out just yet.

See charts illustrating the wave counts on the Dow.

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