Indicators Forecast Dow's Next 500-Point Move

Many traders look at indicators and try to develop trading strategies around tools like the stochastics indicator or MACD. Sometimes, it is a good idea to just see what the indicators are saying without even considering what the price looks like. This idea is shown in the chart below:

Four diverse indicators are shown, and it is difficult to make a bullish case when looking at them:


1. The stochastics is used to find market extremes, and the current signal is bearish with no sign of a buy signal in sight.
2. MACD measures the momentum of the current price trend, which is now accelerating to the downside.
3. Money flow index reformats volume data and shows whether there is more volume on up moves or down moves. The current reading indicates traders are selling with more conviction than they are buying.
4. Relative strength (RS) is used to find the leading trade candidates and many short-term traders buy only when RS is greater than 70, a long way from where the indicator sits now.
We trade price, not indicators, so in the next chart we have only the price data for SPDR Dow Jones Industrial Average (NYSE: DIA), the same ETF associated with the indicators shown above.

The price pattern for DIA shows that the next 500-point move on the Dow is more likely to be down than up. DIA came close to meeting its upside target based on the pattern that formed as prices dipped earlier this year, highlighted as (1) in the chart above. DIA then formed a small rounding top pattern and broke an upward sloping trendline as that pattern was completed, shown as (2), pointing to an initial downside target of about $125.50, highlighted as (3).

Additional downside targets indicate that the price could fall significantly below $125 with support at $120 also marking the level where a large top pattern would be completed. If DIA broke below $120, then the next price target would be $104. That would push the Dow to its first 20% decline since 2009, and a 20% drop after a four-year uptrend should not be considered unusual. The average bull market (periods between 20% dips) lasts 45 months. We are now 44 months into the current bull.

With the Dow expected to fall to at least 12,500 before moving higher, traders should maintain a short bias in the current market. Consider outright short positions or at least avoid adding new money to stocks for now.