Market Watch: Where is the Dow Heading Now?

Posted On February 21, 2018 2:09 pm

Technical analyst extraordinaire Chris Kimble has been tracking a megaphone pattern that has been developing in the Dow Jones Industrial Average since November. From a market watch standpoint, his insights are invaluable.

He now says we’ve reached a critical juncture which presents a major test for the stock market.  Let’s review where we stand.

Back in November, he looked at the long-term historical chart of the Dow Jones Industrial Average and pointed out a megaphone pattern breakout that looked bullish for stocks.

After that post, the Dow Industrials rose over 3000 points into January, before embarking on a long overdue correction.

So what does our market watch indicate now?  Let’s take a look at an updated chart below.

The Dow has spent the majority of the past 70 years inside parallel channels (points A, B, and C). And as you can see below, the Dow’s latest breakout above a megaphone pattern (point 3) has lead to a test of the upper channel (point 4). This is acting as resistance right now.

Look familiar?  It should. This same pattern took shape during the last megaphone breakout (point 1).  That breakout lead to a test of the overhead parallel channel (point 2) in 1987.  That channel acted as (rising) price resistance until 1995, when it broke out once more and went on to test the upper channel boundary.

If this is any indication, its understandable why stocks are stumbling a bit here (at first pass). BUT, if they follow the same pattern, they may continue to test this rising channel resistance… and clearly bulls would LOVE to see the Dow breakout above point 4!

For my money I think the market moves lower, back to the trendline labeled (3) or even into the light blue shaded region.

This has me looking to buy put spreads on the DIA.

The trade I’m targeting is the March 250/245 Put spread for a $1.50 net debit.  This gives me a chance to make $$3.50 or 230% if the Dow retreats a mere 2% over the next few weeks.

Here is the risk graph for the trade.

 Related: Is High Volatility the New Normal?

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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