Market Analysis

Dow Gargoyle

Newsflash while the tech bubble is running: Most major indices still peaked on June 8th, a month ago. Hey, it may mean nothing as yet another stimulus package is just around the corner or so conventional wisdom goes.

Who can say, but I’ll share some charts on the $DJIA here that suggest the perhaps unthinkable and currently unprovable: That all this is still a bear market rally.

Why the $DJIA? Well, for one, it has some of the longest charting history and it contains key components of the larger economy. Yes it includes the tech monsters $AAPL and $MSFT but even they haven’t been strong enough to push the $DJIA to new highs in July.

Rather the $DJIA includes major industrials, banks, financials and a lot of the big companies representing large swaths of the American economy. And folks, it’s looking rather ghoulish.

Let’s start with some basics:

Here’s a daily chart:

Firstly note the $DJIA has not gone anywhere for two and half years. Big range.  Blow-off top in early 2020 then the big crash bringing $DJIA all the way back to 2016 levels. That was a big shock as nearly 4 years of gains were wiped out in a month.

Then the big rescue operation cumulating in an island reversal in June. That reversal has held and the June correction has brought $DJIA back below its 200MA and it has failed every attempt to regain it so far despite tech keeping making new highs.

$DJIA remains above the 50MA as support and that MA is rising. As long as that holds $DJIA has potential to rally higher later in the year.

But note the $DJIA, like many indices still have many open gaps below which puts it at technical risk of future gap fills.

Why the island reversal in June? Why that spot? No technical accident as it coincided with key trend line reisstance:

Note also the perfect bottom at the .50 retrace in March. See, technicals can matter greatly on bottoms as well as on the top ends. Indeed the trend line that was broken in February dated all the way back to 2009 and has now shown to be resistance in June. Classic technical stuff. The implication: $DJIA has broken an 11 year old trend and has failed to recapture it.

But the rally off the lows was powerful, very powerful, over 50%. So that must be bullish right?

Maybe, maybe not, for that rally came on a rising channel that $DJIA now has also broken:

Furthermore 50% rallies are not necessarily a sign of better things to come in context of a structural bear market.

After all we saw a near 50% rally in 1929:

That rally too lasted several months before peaking and then starting to make lower highs which is what I submit the $DJIA has done so far in July.

Maybe a new stimulus package will change that, I can’t say, but we now have tech massively extended and indices such as the $DJIA making lower highs with plenty of open gaps below.

So we’ll see.

But 1929 is so long ago you say, how can a comparison apply? Don’t we have a Fed that saves every dip? Well, that appears to be the case for now. But in the big context of things, including 11 years of central bank printing and a global economy ever more indebted and dependent on zero rates it is perhaps notable that that $DJIA hit its 1929 trend line perfectly when it topped in early 2020.

It was a chart I pointed out on January 3rd as a warning sign:

And now $DJIA has not only rejected that 1929 trend line, but it also broke its 2009 trend line and now has failed to recapture it as resistance:

While most are focused on the day to day action this little journey of the bigger picture I trust offers a bit broader perspective which is to say things are far from as bullish as many project them to be. $DJIA needs to fill the island gap and move above the June highs or it remains technically broken which is suggestive of sizable downside risk in the months to come. Stimulus package or else?

Or what if the stimulus package is not enough? After all while $3 trillion in Fed intervention have managed to juice the Nasdaq to new highs but preciously little else and have failed to technically repair the broken trend on $DJIA. and that makes the $DJIA the gargoyle of this rally to be watched closely.


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Categories: Market Analysis

10 replies »

  1. That’s a useful long term analysis. The jury is still out. Will it be a permanent bull based on infinite liquidity – ‘cos that is what will ultimately be required, or will it reconnect to the reality bear? My position is clear and the same as yours appears to be Sven. I think the jury will return their verdict this month. $AAPL is the pre-eminent juror.

    Elsewhere here I’ve said: “Today’s (7th July) action was conclusive IMO, we should see SPX 3000 within a week, 2800 a week thereafter. Then it depends on reaction to Fed’s next panic move. But we will see SPX 1800 before this game is done, which could be many months.”

  2. Think it would take many trillions of direct stock buying by the Fed just to keep the market at these levels (in nominal terms) , as AVG. PE’s will be 50+ in the coming months. Measured in Gold, the stock market will continue dropping ( see $spx:$gold)

  3. Thank you for the considered analysis and YES everything makes sense. Earnings season beginning next week will bring a measure of reminder that this is a market of individual stocks that in the end revert to the only valuation that ultimately matters…. related to their earnings or rather the lack there of!

  4. I find it absolutely fascinating how technical analysis manages to stay relevant in the bigger picture despite all the money printing and goosing of markets through the media and it especially boggles my mind how real world occurrences coincide with these technical resistance spots on charts. It simply cannot be ignored and yet many do. I’m starting to think technical analysis has place in other areas of life and not just in markets, maybe that bull flag joke you made about the covid chart wasn’t just a joke. Anyways, glad to see you writing more of these texts Sven, you’re doing a precious public service, thank you for that, you’ve taught me a lot and even though I’m not a day trader or much of an investor, it does help to know what to expect in the near term and position for it. It just might save me and my family, as well as many others, from an unexpected downturn while holding the bag. Thanks!

  5. Monsieur Sven , watch for that intraday reversal close …” bull markets end on bullish news and bear markets end on bearish news “ watch everyday at 2pm professionals wait for all suckers to pay then look 👀 at the end of trading session…at 154% GDP it’s imminent

  6. Monsieur Sven , look 👀 for that “intraday reversal close “ “ bull markets end on bullish news and bear markets end on bearish news” futures “ is leveraged astronomically ….successive gaps on hyperbolical meaningless news is a precursor

  7. Good pointers Sven thanks. Yet we know all too well that all of the bearish commentary over the past 3 month here were negated big time. The markets marched higher and you too were surprised time and again.
    Chances are very high that the DJIA will break free of that June 8 resistance and along with the SPX wil be at new ATHs within weeks.
    No TA or historical analysis is going to hold this market form new highs. Stay with the tend is where the money is made.

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