The Bears Are Near: DJIA On The Verge Of Correction
October’s all-time highs seem like a distant memory. The DJIA has fallen nearly 2500 points in a little over 10 weeks.
The DJIA ended the trading week on a miserable note, falling more than 550 points on Friday. By the time the closing bell rang, a 1391 point four-session plunge became a reality. Now, as 2018 draws to a close, the DJIA stands on the brink of correction.
From a fundamental perspective, a great deal has transpired over the past seven days. The G20 brought initial optimism, Twitter rolled back expectations, and Wall Street closed its doors in observation of a rare U.S. national day of mourning. The result was the worst week for the DJIA since the panic of March.
DJIA Long-Term Technicals
October’s all-time highs seem like a distant memory. The DJIA has fallen nearly 2500 points in 10 weeks. Subsequently, corrective territory is only a stone’s throw away.
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As traders, we often times get carried away with overly complex technical analysis. Simple is always better and these three basic observations sum up the situation for the DJIA:
- The long-term uptrend remains intact. Until we see the 24175 area finally give way, then one has to maintain a bullish bias.
- In comparison to 2017, 2018’s weekly trading ranges have been periodically enormous. Specifically, those of the losing weeks, illustrated by the glaring big red candles.
- The intermediate-term fundamentals are not positive. Political uncertainty is on the doorstep with a new Democratic House of Representatives showing up for work next month. FED policy appears to be up in the air, but the FedWatch Index is still assigning a 70% chance of a rate hike 11 days from now. In addition, any U.S./China trade deal is likely off of the table for the near-term.
Going into the second trading week of December, the synopsis for the U.S. stock market is this: The DJIA remains bullish, investor angst is at a 2-year high, and uncertainty is dominating market fundamentals.
Bottom Line: Personally, I am not sold that we are heading into a full-blown correction, at least not yet. The chart above shows us that 11 times this year a weekly candlestick has tested or traded beneath the 24175 level. Each time the market has bounced back, burning short-sellers and those betting on correction. I expect this pattern to hold true until the calendar flips to 2019.
Once we get into to 2019, it will be a whole new ballgame. With a “flexible” FED policy, potential escalation of trade wars, and a likely uncooperative U.S. House of Representatives, the odds of a negative year are pretty good. As we move into the new year, the equities bears may be preparing to end their hibernation.
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