I have been studying the longer term chart of the Dow Jones Industrial Average recently and am trying to determine if the market has the potential to confirm a major top this year. It has been said that it is a fools game to try to pick market tops. In general I agree with this statement, however I still think it is important to try to gauge long term market turns so as to keep on the right side of the major trend when and if it changes. Market tops are a process, not an event and therefore can be very tricky to time. If we focus on some longer term time frames the prediction accuracy usually improves.
- I view the current trading month (March 2014) as being very similar to the November 2007 trading month. The November 2007 trading month was the key pivotal month where the market had to make a decision on pushing higher to continue the bull market, or to reverse lower and start a strong correction. We already know the latter occurred in 2007 and I believe there is a quite strong probability that we are once again to see a strong correction in the current time frame as we transition from March 2014 to April 2014.
- I am expecting or 'looking for' volatility to start to rise dramatically between now and April 21st 2014. The volatility index or VIX made a strong move in early February 2014 but then retrenched quite a bit and was not able to make new lows even as the market rose to slightly new highs (SPY, QQQ, IWM to name a few). This is a key factor in suggesting that the most recent price action in SPY, QQQ, and IWM is a short term topping process instead of a consolidation before new highs.
- There is a Marty Armstrong Panic Cycle targeted for the week that starts March 29th, 2014. After that for several weeks volatility is indicated. Marty's predictive model could serve to supplement the basic bearish technical outlook.
- Despite my near term to intermediate term bearishness, there are still precise levels in the VIX and SPY that if breached would invalidate this analysis.
Let us start by looking at the long term monthly chart of the Dow Jones Industrial Average:
There are a few key points to make about the above monthly chart of the DJIA. First note that the monthly price candlesticks tried to break north from the top upward sloping resistance line. This line connects the year 2000, 2007 and 2014 market swing highs. The DJIA broke through it on the first attempt and then sold back under the resistance line. Then it rallied back up and tried to break it again in the month of February 2014. So far in March it has been attempting to break through again, but now there is only a window of 10 trading days left in this month to achieve the goal.
This is why the next 10 trading days are so crucial as we finish the March price candlestick. If we start to sell down hard into the end of March 2014 ( which is what I expect ) then it will start to confirm a third failure attempt at breaking to new highs above long term top line resistance.
It would also (and this is very key) start to move the current monthly MACD histogram bar (in pink color) under the zero line. I do not know if the current monthly histogram bar will start to shrink under the zero line, but if it does not occur in March, then it seems highly probable to occur in April 2014. Why care about the monthly histogram bar ? The movement of the pink histogram bar from a position of being positive and above the zero line to below the zero line can translate into a high volatility event and significant price destruction. This is exactly what occurred in 2007 November time frame and seems probable to occur in 2014 March to April time frame as well.
What levels near term in the SPY and VIX would cause a failure of the bear case ?
A move in the SPY on a closing basis above 187.14 would start to destroy this analysis. In the VIX a move below 14.80 on a closing basis would also put the bear case in serious doubt. However, as long as these mentioned levels hold, I think the bears have a really good shot at seeing some very high volatility as we transition from March to April 2014 with possible peak volatility starting to occur at the end of March 2014 and beginning April 2014.
Now for the fun part...
Assuming the above analysis is correct and we do start to see high downside volatility from present time frame into April and even May, then the next major key level on the DJIA is close to 14,500. Near 14,500 is a crucual level for the DJIA and one can also see this on the above price chart because it is a level that would rest on the upward rising bull trendline that began in March 2009. That level is a must hold level to keep bull market possibilities intact. If the level is broken to the downside, then it starts to open the door to much more bearish scenarios for the DJIA on a longer term basis.
If we assume that the DJIA makes it near 14,500 between now and May, one has to also consider the possibility that any bounce from this zone will fail quickly and then show a broken uptrendline. Why? Because this would be the third time to test the uptrend and it is not uncommon to see supports and resistance typically broken on third attempts.
In the very near term the bear case will start to gain some real traction if we see the SPY break below 184. 184 on the SPY marks the neckline of a small head and shoulders potential topping pattern.