Is there a Dow Jones Industrial Average Correction on the Horizon?

A Dow Jones Industrial Average correction appears to be ahead based on technical analysis and constant media cheerleading for the market to head south.  If a message gets repeated enough and has a large enough virality across trusted media, the message becomes legitimate.  Are there fundamental reasons to be down on the United States’ blue chips in the Dow Jones Industrial Average?

The Dow Jones Industrial Average (DJIA) is mirrored by the Contract for Difference (CFD) – US30.  The nice thing about the US30 chart compared to the Dow Jones Industrial Average chart is that it takes into account all hours of the day, which makes it great on smaller timeframe charts.

Dow Jones Industrial Average Correction

The divergence on the daily chart was rather clear between the MACD of the DJIA and the DJIA during the period from December 2016 through early March 2017.  There was a sell-off during the Spring of 2017 (for our friends in the Northern Hemisphere), but it was not even close to the definition of a correction, which is a 10% negative move in the market to adjust for overvaluation.  The daily chart has clear demand zones (support zones), but no obvious resistance levels because the level of the Dow Jones Industrial Average is at highs previously unseen.

However, on a shorter timeframe chart such as an hourly chart, there is more information to be gleaned at least for a shorter term basis.  This chart points to a possible Dow Jones Industrial Average correction or at least close to it.  Corrections give market participants an opportunity to take profits and re-discover value in quality publicly traded companies.

Dow Jones Industrial Average Correction

The August 31 through September 6 swing in price is during a Holiday Weekend in the United States and the best possible swing to examine is the end of August 2017.  It shows how prices overextended and Fibonacci extensions along with a demand zone make for an interesting support zone, which upon breaking could lead to a somewhat corrective drop to the most tested area, which is 21,749.  Getting back to 20,000 would be a market correction and the market could bounce from this strong psychological level.

However, this is all subjective and fuzzy.  It gets even fuzzier when technical indicators are introduced into the conversation.  Notice how in the past two weeks, the MACD has been declining while the DJIA has surged, this divergence is commonly considered a foreshadowing of a reversal in the market.

The supply zone (resistance) has yet to be tested, but if it is and the price is rejected with a sharp drop-off, it is a sign that the Dow Jones Industrial Average could reverse and the question is whether there is enough momentum to take it into correction territory.

The key levels to watch

Support side:

  • 22,403.5
  • 22,411

Resistance side:

  • 22,310
  • 21,749
  • 21,357
  • 20,000
  • 19,775

A Look Back in Time at the Dow Jones Industrial Average in the Autumn

Historically, the past four Autumns (Northern Hemisphere) have been tales of two halves for the Dow Jones Industrial Average.  The first half goes one way and the second half is corrective and sets the tone for entrance into Winter the other way.

  • In 2013, the DJIA dropped in September, but rose in October and the rest of Fall going into the New Year on a rally.
  • In 2014, the DJIA dropped in September and then rallied back in mid-October to set up an extremely strong finish to 2014.
  • In 2015, the DJIA dropped in September and then rallied back in October to set up an strong finish to 2015.
  • In 2016, the DJIA was in a state of slow decline up until Election Day 2016 in the United States.  There was a massive sell-off in reaction to Donald Trump’s Election as President of the United States.  There was an even stronger rally in response to the sell-off and it continues to this day.

2017 has seen the reverse thus far and there are fundamental reasons to expect a Dow Jones Industrial Average Correction.

Expectations of a Federal Reserve rate hike in December, which would tighten credit markets and have a negative effect on equities.

Tax Reform or even mere Tax Cuts do not happen.  The stock market has responded positively to the Presidency of Donald Trump because of the expectation that the Republicans in the House of Representatives and Senate will be able to radically simplify and reduce taxes, which would benefit small and large businesses as well as attract businesses and capital to the United States.  However, a few key members of the Senate may not on be on-board with the plan to make the changes.  Democrats are likely to be in lockstep opposed to the plan believing that Trump is an unpopular President worthy of resistance and will oppose Trump at the fear of angering their growing Progressive and Democratic Socialist base.  Democrats from so-called “Red States” were thought to cross-over on a few votes to placate their voter bases, but they are starting to feel that there is no reason to work with Republicans.  With a 52-48 majority, Republicans have a tenuous hold on the Senate and a party without any sort of a lockstep will have difficulty getting anything meaningful passed.  The Republicans in the Senate are largely impotent as a few Senators always will be against the legislation proposed by leadership whether it be a more “liberal” solution or a more “conservative” solution.  At this stage, Republicans actually hold a 50-50 Majority with Vice President Michael Pence serving as the tie-breaking vote as Senators Lisa Murkowski (R-AK) and Susan Collins (R-ME) are eager to maintain the status quo when it comes to domestic policy.  All it takes is one other dissenter and President Trump has nothing to sign on his desk.

Political instability has paralyzed Washington D.C. as the legitimacy of the 2016 Elections and investigations surrounding Donald Trump and his associates’ connections to the Russian Government continue.  Anything that puts the stability of the Executive Branch will lead to negative sentiments and reasons to sell anything American.

War is typically good for the equities markets, but the contiguous 48 States of the USA have yet to be involved in any sort of a battle or attack since the horrifying Events of September 11, 2001.  North Korea poses a nuclear threat to the United States that could petrify world economies and create a Mutually Assured Destruction that could forever change the world and possibly result in a Third World War.  Sanctions against North Korea have risen, but the regime in Pyongyang is not budging.

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