The past seven days have seen choppy trading in the major indices. The Dow Jones Industrial Average was no different, and was exposed to the same volatility, but still managed to nail the milestone 14,000 mark last week.
Of course, while “Dow 14K” makes for a great headline, the question worth asking is “What now?” In hopes of finding an answer, let’s look at the charts. (For charting purposes, I am using the DJX index, which is 1/100 of the value of the actual Dow Jones index.)
The last time the Dow tickled 14,000, it was October 2007 and the market collapse was neigh. Big. round numbers such as 14,000 have a tendency to act like a magnet … but when it comes to meaningfully pushing past these price points, it often takes backing and filling before ultimately heading higher (or lower for that matter).
As the Dow approached the 13,000 mark in February 2012, it quickly corrected a few percent before pushing past the level more meaningfully. By early May, the Dow had rallied 3% past the 13K mark, but one month later it was again testing the 12K area. Similar market action was observed when the Dow wrestled with 12K in the first and then again in the fourth quarter of 2011.
I am expecting similar market action at the 14K mark (actually it was 14,200, which is only 1.5% away from current levels). We should see a retracement of a few percent, followed by a meaningful breakout past 14K … however, that eventually will fall back below the mark in order to consolidate for a longer period of time. Eventually, over the course of 12 to 24 months, the Dow will then be able to get itself together to really move past 14K for a longer period of time.
On a closer-up daily chart, note that the Dow Jones has been trading in an orderly upward-sloping channel. The choppy push higher in recent days has now finally brought the index to the top of this range, where consolidation of a few percent would give it a better chance to break past the mark.
The cyclical stocks are owed some thanks for pushing the market higher in recent weeks. Looking at the Morgan Stanley Cyclical Index, note that it too has now reached a good area of resistance, favoring a little pullback before pushing higher.
Is the Dow Jones Industrial Average reaching a significant longer-term top? It’s simply too early to tell; however, thus far, current broader market structure and price action does support higher stock prices through at least the first quarter of 2013.
As far as the near-term price action possibility for the Dow goes, the odds favor a correction of 2% to 5% before a more meaningful push past the 14,000 area stands a better chance.