In January commentators were already telling us the Dow rise was unsustainable and that a significant crash was inevitable. This mantra has continued for the past five months. In January we set an upside target for the Dow at 21,000 using chart projection methods. The target was achieved in March and has been retested several times.
The 21,000 level is a significant resistance level, but its not the end of the Dow uptrend. In the short term the upside target is 21,600. In the longer term, the Dow has target near 23,700. These targets are calculated using chart pattern analysis.
The DOW and other major stock indexes like the S&P 500 have one feature that ensures that they will continually rise and break new records: They are built on survivor bias.
Survivor bias means the index is made up only of winners. Losers are dropped from the index. There have been 133 different companies in the list of 30 stocks in the Dow. Only GE has been a consistent member over the 120 year history of the index, and even it was dropped from the index between 1901 and 1907.
The resistance near 21,000 is psychologically important and its that behavior that we trade.
The Dow chart now has three significant chart patterns and they combine to define the DOW rally in the short term and the strength of the longer term uptrend.
The first feature on the Dow chart is a long term uptrend line. This uptrend line starts in 2011, October. Between 2011 October and 2015 August the uptrend line acted as a support level.
In 2015 August the Dow moved below the uptrend line and then in 2017 February it again moved above the trend line. The trend line is projected into the future and it will continue to act as a support level.
The second feature is the well-established trading band. The lower edge of the trading band is near 15,600. The upper edge is near 18,300. The width of the trading band is measured and then projected upwards. This gives a target near 21,000 for the Dow.
Applying the same methods to the break above 21,000 gives a longer term target near 23,700. In the shorter term the recent consolidation pattern between 20,400 and 21,000 gives an upside target near 21,600.
The third feature is the uptrend line starting from 2016 February. The slope of this new trend line is different from the slope of the long term uptrend line. The result is an ascending or rising wedge pattern. Its not a perfect pattern because its interrupted by a dip below the lower trend line in 2016 November.
A rising wedge is a bearish pattern that signals a high probability that prices will collapse and head in a downward direction.
As the price moves towards the apex of the pattern the momentum weakens. A move below the lower support is a reversal in the upward trend. These two lines intersect around July 2017 so there is plenty of time for continued bullish action. However traders will be alert for end of trend signals as the apex of this rising wedge is reached.
When these three features are combined it provides information about the way the Dow breakout above 21,000 will develop. The long term trend line will act as a support level. We use the ANTSYSS trade method to extract good returns from these index movements.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, which can be found at www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe. He is a special consultant to AxiCorp.