Sentiment Speaks - The Dow Is Trying To Climb Its Way Up To 22,000 But The Slope Is Getting Slippery

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Includes: CRF, DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PPLC, PPSC, PSQ, QID-OLD, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWL, RWM, RYARX, RYRSX, SBUS, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPSM, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU-OLD, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, USSD, USWD, UWM, VFINX, VOO, VTWO, VV
by: Michael Golembesky

Summary

Price action over the prior year.

Anecdotal and other sentiment indications.

Price pattern sentiment indications and upcoming expectations.

Price Action Over Prior Year

As of the close on July 10th 2017 the Dow Jones Industrial Average was up over 38% from the low that was struck on January 20th, 2016. The Dow is now sitting near its all-time highs as it attempts to climb its way up directly up to the longer term target zone which currently sits just over that 22,000 level.

While the Dow still has a shot at making it directly up towards that target zone the slopes are getting slippery and the Dow really needs to hold on here if it’s going to be able to make it to the target zone before seeing a corrective move lower before once again moving higher towards the end of 2017 and into 2018.

Anecdotal and Other Sentiment Indications

Now during this 38% run since the January of 2016 lows the market has seen what seems like a major bombshell event that would crash the market at any time. This “tumultuous” move up off of the 2016 lows saw the unexpected passage of Brexit, the contentious US Election with yet another unexpected result, non-stop banter of Russian meddling in the US election process, multiple terrorist attacks, a string of interest rate hikes from the US Fed, and a host of other bombshell news events that, according to the financial pundits, should have caused the Stock Market to crash. Despite all of these bombshell events, the Dow is still not only up over 38% since the 2016 lows but has done so with very shallow corrective moves. This has left most of the financial pundits and market participants completely shell shocked. The shock did not from the market crash that they were expecting during all of these tumultuous events but rather from a market explosion to the upside.

Despite all of these bombshell events, the Dow is still not only up over 38% since the 2016 lows but has made this run with what have mostly been very shallow corrective moves. This has left most of the financial pundits and market participants completely shell shocked. The shock did not from the market crash that they were expecting during all of these tumultuous events but rather from a market explosion to the upside.

This is not surprising to those of us who analyze sentiment as it is quite typical for these types of bombshell events to either mark low points in sentiment as reflected in the markets or simply register as a small blip on the radar screen of an even greater positive mass social mood.

So this begs the question if none of these bombshell events could stop the market's run, just what will it take to do so? The answer to this question is actually quite a simple one; the market will continue to move higher until sentiment levels get to the point where there is once again fear in the stock market. Of course, this will not be the market partcipants fearing a market crash but rather fearing missing out on the markets next move higher, which is precisely when it will not come.

Price Pattern Sentiment Indications and Upcoming Expectations

While the market is getting closer a sentiment extreme we still have what is an incomplete pattern off of the 2016 low signaling that it is unlikely that we have yet to reach the extreme sentiment levels needed to suggest that we have a major top upon us. What this does suggest however is that that the frequency of the corrective moves to the downside followed by rallies back to the upside is likely to increase.

As the Dow continues to move higher and higher it will become more probable that these corrective moves will also become deeper and/or longer in duration as we move through the larger wave degrees, many the size of which we have not seen since the June of 2016 “Brexit” low. This larger degree bullish pattern should however still take the Dow higher into at least the end of 2107 and likely deeper into 2018.

Looking at the weekly chart below I am still counting the Dow in a larger degree third wave that began off of the 2009 low. From a Fibonacci perspective, the Dow is still currently trading within the lower end of target zone for the third wave of this degree, however, from a structural perspective, the Dow still has what is an incomplete pattern of the final leg of this third wave.

DJIA Weekly
This incomplete pattern off of the 2016 low can be more clearly seen on the daily chart below where the smaller degree wave structure is more visible. As we can see on this daily chart then the Dow still likely need one more leg down for a fourth wave [wave (4) on the chart] followed by another leg higher to finish off the final fifth wave [wave (5)] on the chart again into at least the later part of 2017 and more likely deeper into 2018.

The support zone for the fourth wave of this wave degree [wave (4)] currently comes in at the 20,263 -19,311 zone, this zone will continue to move higher should the Dow continue to extend higher, but for now as long as the Dow is trading over this zone we still are following a very clean pattern that should take us higher over the next several years. A break of this support zone of this degree would be the initial signal that the pattern may be breaking down with further confirmation of a breakdown coming with a break of the 18,800 area.

DJIA Daily

While this is the larger degree support zone that I will be keeping a very close eye on after we do indeed top in this next wave (3) there still is yet one more pattern that still looks to be incomplete off of the April 18th low as the Dow still only has what counts best as three waves up into current levels off of that April 18th low. This pattern is more visible by zooming in once again on the four-hour chart below.

If the Dow is able to follow-through in an impulsive pattern up off of that April 18th low then we have an ideal target zone on this smaller degree timeframe right in the 21,971-22,429 zone. This zone has excellent confluence with our larger degree Fibonacci target level of 22,176 as it falls right with that smaller degree target zone.

Conversely, if the Dow is not able to hold the 21,084 level prior to making another high over the June 3rd high it would be the initial signal that the Dow may have formed at least a local top and potentially may even have a top in place for all of wave (3). Further confirmation of this top would come with a break of the 20,553 level at which point I would begin to look towards the larger degree support levels as noted above in the daily chart.

DJIA 4 Hour

So while the slope may be getting a bit more slippery as the Dow approaches the 22,000 level, as long as we continue to trade over our larger degree support levels it is still likely that we still have several more years before a significant peak is reached in the Dow Jones Industrial Average and equity markets in general.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.