Dow Jones Archives | Opportunity Identified

October 15, 2015 | Posted by David Zarling, Head of Investment Research

Mega Pattern On The Dow

A unique pattern on the Dow Jones Industrials Average has been in the works for almost two decades. Developing since the late 90’s, this broadening formation of price is called a megaphone pattern. Just as the pattern suggests, price forms boundaries, that when connected with trend lines, form the shape of a megaphone. We can take a look at this formation in the chart below.

(click to enlarge)

As you can see, these trendlines identify important price levels on the Dow, a major U.S. largecap index worth paying attention to. When we connect the lows from the late 90’s, 2002, and 2009 we get a downward sloping trend line. When we connect the highs from 1999 and 2007, we get an upward sloping trendline. What makes this pattern significant is that price is reacting strongly to this level. In fact, just recently, price rapidly fell through it and now this 15 year old upper trendline is providing stiff resistance. Let’s take a closer look.

(click to enlarge)

As you can see, this trendline has significance. We are not interested in U.S. largecaps until this trendline is recaptured. That could happen today. It could happen tomorrow. No one knows. If anyone tells you they know where price is headed, they are fooling you. As for us, we’ll continue to let price guide us. And right now, this development carries significant risk.

As always, trade safe. We’ll keep you updated on price.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.

January 4, 2015 | Posted by David Zarling, Head of Investment Research

What Does the Decennial Cycle Say About 2015?

The decennial cycle is one of several cycles we look at when doing our investment homework. It’s an important cycle that dates back to the late 1800s when Charlie Dow first created the Dow Jones Industrial Average. This pattern considers the stock market performance in years ending with the same number. Currently, we are in the early stages of 2015, which is the fifth year of this decade. In our cycle study, we include this year with 2005, 1995, 1985, 1975 and so on. And upon reviewing the data, it’s clear that the 5th year of the decade has an amazing track record. The average return for the Dow Jones Industrial Average since 1895 for the 5th year of the decade has been 28.93%! Just as impressive (if not more so) is the consistent performance of 5th years. In fact, 11 out of the 12 5th years were up with the exception of 2005, which experienced a calamitous -0.61%. [thick sarcasm]

The first chart below shows the impressive consistency of each decade’s 5th year. The second chart below shows just how significant year 5 is compared to other years in the decennial cycle. No other year comes close to having the returns that year 5 has seen.

As impressive as this research is, we’re not going to trade solely on this information. But, we think it’s valuable to keep an eye on it as we head into this 5th year. The decennial cycle certainly suggests the current bull market will continue. Anything opposite will be historic.

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October 28, 2014 | Posted by David Zarling, Head of Investment Research

Levels Recaptured. Now What?

Back on October 17th, we found reasons for an immediate bottom (which turned out to be an accurate assessment). And on October 19th, we identified some levels in common indexes that would allow us to hold long positions. Those levels have been recaptured. Now what? Our head is on a swivel, identifying if/then scenarios in an incremental risk environment. There is still overhead resistance at downward trend lines off the highs from September. We’d like to see new highs made, and kept. Anything below the levels identified on the 19th, and we are out of our long positions. Yes, tomorrow is FOMC day. Don’t trade what you think the market should do. FOMC days are notoriously counter intuitive (what ever the market does tomorrow, be ready for the opposite to take place in the following days). Trade what you see. Price holds the final say.

Must stay above 1905 and make new highs.

Must stay above 16600 and make new highs.

Must stay above 1100 and make new highs. Right at downward resistance and Fib 62.8% — Must stay above 1100 and make new highs. Daily close at downward resistance and Fib 61.8%.

October 19, 2014 | Posted by David Zarling, Head of Investment Research

Attention Slow Money (IRAs / 401ks) – Risk Ahead!

Investing is all about risk management. Preventing loss is just as important as realizing gain. There are periods in the market where Return of Capital is the more appropriate approach than Return on Capital. Now is one of those times. Those retirement vehicles (401ks, IRAs, etc.) that have exposure to the US equity markets would be prudent to reduce that exposure at this time. You are an adult. You make your own decisions. You do not make investment decisions based on what you read here. You know the drill.

The last couple weeks have done some structural damage to the market. We identified the need to watch the S&P 500 closely back on October 8th. Those levels broke down and were a sign to look for lower prices. We got lower prices and even broke significant support at 1900 on the S&P (by the way, breaking significant support levels are a hallmark of a directionally shifting market – in this instance, from an up trending market to a down trending market). What did this breakdown mean? Something has changed. Specifically, the likelihood of lower prices ahead has increased. That means risk has increased. We don’t like to lose money if we don’t have to… So when the market tells us something has changed, we listen. You should too.

After a good deal of studying many markets and charts, I’ve identified some levels on three US major markets (Dow, S&P 500, and Russell 2000) that would need to be recaptured in order for any equity exposure to be increased or reestablished. Right now, the risk of loss is too high to consider hanging around to see what happens. If these levels are not recaptured soon, then lower prices are likely. If these levels are not recaptured, the best case scenario is sideways price action for a few weeks. One thing is for sure, the next few weeks have a high likelihood of volatility (large price swings), which is also a hallmark of trend change.

In summary, the current potential for reward it too low compared to the current exposure to downside risk. The body of evidence (including Intermarket behavior, cycles, internal breadth, seasonality) point to a dangerous week ahead. We even noticed that today marks the 27th anniversary of the 1987 stock market crash. Does that mean it will again this week? Absolutely not. But volatility and risk are upon us. Buyers beware. Risk ahead!

Here are our levels as annotated on the charts. Hopefully, we can recapture these levels and evaluate the next move. Be careful, curious investor.