The Dow is approaching a major tramline

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.

The Fed isn’t the only one with a problem

The prevailing ultra-low interest rates have not produced the growth in jobs in the real economy to the degree the Fed would like to see. It has diverted savings from interest-bearing instruments into riskier stocks as investors search for yield and capital growth.

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.

They have a problem! And so do we, as traders.

Solid resistance at the upper tramline

The three main US indexes I follow are the Dow, the S&P and the Nasdaq. The Dow contains 30 solid household names, which continue to pay good dividends.

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:

Dow Jones spread betting chart

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:

Dow Jones spread betting chart

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.