Charts used in technical analysis suggest the Dow is climbing toward 30,000.
Let’s explore that idea with some background first.
When the Dow Jones Industrial Average DJIA, +1.39% was trading around 18,000 points, The Arora Report laid out a scenario for Dow 30,000.
The Dow is now trading around 25,000, and the prevailing wisdom is that the benchmark will reach 30,000. Of course, some bears are still around.
When The Arora Report first laid out a scenario for Dow 30,000, I got a fair amount of hate mail. Gurus who are now tripping over themselves to raise their targets were incredulous of that call. To be fair, the number of hateful emails was small compared to those received when The Arora Report gave a signal to sell gold (ETF of interest is GLD, -0.13% ) at $1,904 an ounce and a signal to short-sell gold. At that time, everybody was bullish on gold. Subsequently, gold fell to under $1,100. The Arora Report repeatedly laid out the fundamental scenario for Dow 30,000. Based on rising earnings, this scenario is still valid. Please see “Here’s the case for Dow 30,000 in Trump’s first term.”
Chart
Please click here for an annotated chart. The chart is of S&P futures ESH8, +1.27% Similar conclusions can be drawn from charts of popular ETFs S&P 500 ETF SPY, +1.59% Nasdaq 100 ETF QQQ, +2.04% DJIA ETF DIA, +1.37% and small-cap ETF IWM, +1.30% Futures have the advantage that they trade through the night, and some of the more important action occurs when ETFs are not trading.
Please note the following from the chart:
• A “W” pattern is forming. This is a bullish pattern.
• Please click here to see a chart that The Arora Report published at the depth of the correction to understand the progression of the W formation. We shared with our subscribers at the time that a W formation was more likely than a bearish break. For more, please see “Stock market patterns suggest bullishness will triumph over bearishness.”
• The chart shows Fibonacci retracement levels.
• The chart shows that the market is consolidating between 50% and 61.8% retracement levels. This is a positive.
• The chart shows two key levels from which the overshoot occurred in January 2018. Overshoots are common in the market.
• The chart shows that the consolidation is occurring above the key levels. This is positive.
• The pattern that is being set up often leads to a move up but with significant volatility.
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Long-term setup
Please click here for a chart showing the long-term technical setup. For the sake of transparency, this is the same chart that was previously published without any changes. For more details, please see “The average investor is making a classic mistake as the Dow marches to 30,000.”
The sum total of the foregoing is that the chart is showing that the market will go to Dow 30,000 after a period of volatility. However, it is important to note that technical analysis does not always work well these days. Please click here to see the reasons. For this reason, fundamentals and the macro picture must be taken into account.
Two areas of concern
One major area of concern is that in this consolidation, the “smart money” is consistently selling into the rallies.
The other concern is that if the Federal Reserve raises interest rates rapidly or the bond market gets ahead of the Fed with higher yields, a bear market is not out of the question, although not likely at this time.
At present, the bond market is very oversold. Bonds may rally to relieve the oversold condition. Such a rally may ignite a short-term rally in stocks.
It is important to remember Arora’s Second Law of Investing: “No one knows with certainty what is going to happen next.” For this reason, investors should not get locked in any one point of view. Looking at various scenarios and their probabilities are the only realistic tools to make good, objective decisions.
Various scenarios and their probabilities are the major factors in determining what positions to hold, appropriate cash levels and appropriate hedge levels.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. All recommended positions are reviewed daily at The Arora Report. Nigam Arora is an investor, engineer and nuclear physicist by background and has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.