It is still too early to call a top in the Dow.The market continues to grind away higher with a seemingly endless supply of gas in the tank, writes Mike Golembesky, lead analyst on ElliottWaveTrader.net and specializes in coverage of U.S. indices, including the VIX, plus Forex.
The Dow Jones Industrial Average (DJI) continued to move higher, having only one red close since the low that was struck on September 26. Furthermore, the Dow has now broken through a key longer-term Fibonacci resistance level that we had been watching for quite some time at the 22,707 level.
So although the Dow is quite stretched at current levels, the pattern still does look incomplete, thus leaving us with no solid signal of a top being in place just yet.
My colleague and the lead analyst of the Stock Waves service at ElliottWaveTrader.net, Zac Mannes, created a chart that visualizes the emotions that investors feel as we move through the Elliott Wave Cycle. Zac overlaid the Cycle of Investor Emotions graph, which was created by Barclays, onto his SPX Elliott Wave chart. Zac had first created this chart in the later part of 2016, and it has been very interesting to watch it play out in real time.
In November 2016 we were just coming off of the election lows and there was still a lot of reluctance in the markets and investors were still unsure what to make of the Trump presidency and how it would affect the markets.
As the markets continued to move higher into 2016, we began to see more optimism being displayed, with many pundits and investors alike extolling the virtues of what was sure to be President Trump’s pro-business policies.
As the markets continued to move higher into the late summer, we began to see this optimism turn into excitement. This excitement is manifesting itself into positive news stories like that of Trump’s tax reform plan and how it is sure to keep this market moving higher into the future.
The last and final emotion on Zac’s chart is one of exuberance. At this stage in the cycle, we will see the news presented in an even more positive light as the market rally seems to know no bounds. Exuberance will likely be short-lived and will quickly be followed by denial, fear, desperation, panic, capitulation and despondency.
Of course, most don’t want to even think about those emotions, yet let alone talk about them, so we will save those for a later date.
Last week I laid out two distinct paths for the Dow, as shown in white and yellow on my charts below. From a pure structure perspective, there really is not much change to these paths as the Dow has simply continued to extend higher. What has changed is the support levels that we will be watching to signal that we have either local or larger degree top in place in the Dow.
Under the yellow path, the Dow would still need to see yet another fourth wave down followed by a fifth wave up to complete the larger degree pattern. Under this case, support for this minor degree fourth wave would come in at the 23,434 -22,232 zone. This would be the support zone that I would want to see broken to give us an initial signal that the Dow has put in a larger degree top per the white path. If that support zone holds, then it would suggest that the Dow will still see another high to finish off the wave (v) of the larger degree pattern under the yellow path prior to topping.
I reiterate that it is still too early to call a top in the Dow. I do still remain cautious in the near term as we are still trading in a larger degree topping zone. If and when we break the support levels noted above, then it will give us more confidence that a top has indeed been struck in the Dow. Until that occurs, however, the market continues to grind away higher with a seemingly endless supply of gas in the tank.