Potential stopping point?

As everyone has seen over the past several months, the stock market simply goes up.  Sometimes it seems borderline comical. No matter what the news, no matter how sluggish the economy, no matter what the start of the day looks like nor what the technicals look like, up we go.

So, weeks ago I began telling the students that I coach that I had given up on the idea that a resistance for the market exists since the market never seems to resistance anything. As the saying goes, “Resistance is futile”.  Instead, let’s just let the market play out and eventually it will tell us when it’s going lower. After all, let’s not loose sight of that fact: The market will pullback, it will correct, and it will eventually enter a bear market again. These are the facts of the stock market. What isn’t a fact is when any or all of these things will happen?

Last week, I noticed a trend line moving into range that I had not looked at for years.  I don’t look back more than a year or so very often, but with the market going up, up, up, an important potential resistance came into play. So, please take a look at the long-term, quarterly chart of the Dow I have shown below:

This channel has been forming for decades, so it’s importance is paramount.  As I tell my students, any (2) points can start a trend line, but a 3rd or more confirms it. If you notice my notations, you will see how often the channel resistance (red) and support (green) have been tested.  Remember, after the 2nd test of these levels, the market decided they were important levels, not me. You will also notice how often the 50% mark (blue) between these levels has acted as either support or resistance, such as with the 2009 low.

As the market has rallied over the last 6 months, you can now see why the upper trend line resistance came into my view.  However, here’s the problem: It is very difficult to pin an exact number on where that resistance lies. I’d look at it as more of a range, somewhere in the general 12,500 area. Again, depending on how/where the individual draws this channel, that target price can have a several 100-point variance above or below.

The Tale of the Tape: A very important channel resistance has come into range on the Dow.  In the long run, if you believe the market is still in a secular bear market that will return, this range around 12,500 could be a potential turn around point. This level is of more importance to you if you are the long-term trader or investor. For you, make sure protective stops are in place, or feel free to lock in some great gains at your discretion. For short-term traders, the trend is still up, but be on the look at for a reversal. If the trend were to change from up to down, you would obviously want to adjust your trading strategy.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT