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The Dow is approaching a major tramline
The rally in the Dow has risen to the upper limits of its trading channel. John C Burford examines the charts to see if it is likely to break through.
Today should be eventful. The monthly US Federal Reserve meeting minutes will be released and the market will be reading it very carefully (and nervously).
The reason is very simple the market is fixated on what the Fed does or signals (or does not). The current QE (quantitative easing) programme of buying $85bn worth of bonds per month is under intense scrutiny right now.
The problem is this: the US economy continues to under-perform month after month. It can therefore be argued that the $85bn has been insufficient in terms of producing the level of GDP and jobs growth the Fed is looking for.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
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On the other hand and what economist is short of hands? the massive flow of bank reserve deposits is creating huge asset bubbles' in some markets, particularly the stock markets. The Fed must be eyeing the steep rise in stock markets with alarm.
The S&P consists of 500 companies over a broad range of industries and is considered more risky than the Dow.
Then there is the Nasdaq, which contains many younger and smaller high-tech companies, and is the riskiest of the three.
The S&P and Nasdaq have moved into all-time highs recently, while the Dow has not. There is a clear divergence and that is not a sign of a healthy bull market.
I have kept this chart of the daily Dow for some time:
This is an excellent tramline pair because they both have several good touch points. And today, the market is only around 80 pips off the upper tramline.
Here is a close-up of the last leg up:
The rally off the early October low has been persistent. It is even more one-sidedly bullish than in the similar period off the 24 June low.
But because my tramlines have contained all trading since March within the trading channel a period of seven months chances are the upper tramline will hold.
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John is is a British-born lapsed PhD physicist, who previously worked for Nasa on the Mars exploration team. He is a former commodity trading advisor with the US Commodities Futures Trading Commission, and worked in a boutique futures house in California in the 1980s.
He was a partner in one of the first futures newsletter advisory services, based in Washington DC, specialising in pork bellies and currencies. John is primarily a chart-reading trader, having cut his trading teeth in the days before PCs.
As well as his work in the financial world, he has launched, run and sold several 'real' businesses producing 'real' products.
