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All Time Highs are Hard Work; DJIA Takes a Breather

All Time Highs are Hard Work; DJIA Takes a Breather

Jeremy Wagner, CEWA-M, Head of Education


Talking Points

-DJIA (Dow Jones Industrial Average) closes up 12 of the past 14 trading days

-Fed rate hike expectations still low near 42% for December 2016

-Anticipating an eventual break higher above 18,575 towards 19,700-20,000

Dow Jones Industrial Average has closed up 12 of the past 14 trading days with the last 2 days consolidating in a tight range. Low expectations for Fed rate hikes continues to be a driver for equities. Fed rate hike expectations continue to show 42% chance of a hike in December 2016 which means a 58% chance of nothing happening.

We have been calling out since July 8 (before the break higher) that 18,575 may become a speed bump for US30, a CFD which tracks the DJIA. US30 has consolidated in a tight range for the past 2 trading days between 18,571 and 18,462. We anticipate this will be just a speed bump meaning prices eventually overcome 18,575.

Chart prepared by Jeremy Wagner

It is quite possible for a small sell off to ensue from nearby levels. Therefore, a move lower to either the orange horizontal line (18,365) or the black horizontal line (18,167) would be completely normal within the current structure. Keep in mind, the current pattern appears to be in a 3rd wave higher which tends to be the strongest of the 5 wave sequence. Therefore, in this apparent pattern, is not required for the sell off to reach the lines above. If they did, it would offer a good risk to reward ratio opportunity.

As an alternate, it is possible that our interpretation of the pattern is incorrect and prices sell off below 17,725. Although we consider this a much lower probability, prices then likely revisit 17,000. We will need to readdress the pattern if that happens.

From a sentiment perspective, traders continue to pile in to the short side of the coin as only 7.5% of the traders with a position are long. Typically, sentiment (SSI) is a contrarian indicator and suggests more gains are coming for US30. (Learn more about trading with SSI here.)

Bottom line, the risk to the immediate bullish view can be moved higher to 17,725 as we consider buying dips or breaks higher.

Suggested Reading: Dow Jones Industrial Average Punches Back After Brexit Collapse

Interested in a longer term outlook for equities? Download our quarterly forecast here.

Do your losing trades overshadow your winning trades? Learn about the psychology behind why that might be happening in our Traits of Successful Traders research.

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX EDU

Follow me on Twitter at @JWagnerFXTrader .

See Jeremy’s recent articles at his Bio Page.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.