The answer to the question “Could we see the Dow Jones Industrial Average reach 20K?” is, as almost always, “It depends.”
Theoretically, upside is unlimited. However, since I can’t find much love among theorists because the nature of trading demands me to be a realist, I will point to the facts that upside is limited in any given time frame and depending on where in the cycle of the swing we find ourselves.
As a simple example, consider a stock that, barring any merger and acquisition deals, has traded higher for 10 weeks in a row and on average at least 3% per week.
For an investor with a time frame of multiple weeks, buying into such a steep slope and long rally without a break very much limits his upside potential. On the other hand, if this same stock belongs to a cyclically sensitive sector — i.e. tends to do well when the economy is accelerating — and the economy is just coming out of a recession, then the investor with time frames of at least a few months has much more upside potential.
So if we take a look at the Dow Jones through a technical lens, we note that in the early part of 2013, it broke past a resistance level that has been in place since 2007 — the peak before the financial crisis hit stocks. At the same time, if we consider the Dow’s price action since 1997, we see that from this long-term perspective, this breakout resulted in a push out of a 15-year sideways move, and thus should offer up plenty more upside in the coming years.
In other words, the 20,000 mark for the Dow, which is currently just about 25% away, is certainly reachable within the coming two to three years.
However, this does not make the analysis and conclusion in and of itself very relevant, because …
- Much more money can be made by investing in the groups of stocks that do best in any part of the cyclical swings in coming years.
- Unless one’s investments have the same two- to three-year time frame as it could take for the Dow to potentially hit the 20,000 mark, the noise from all the news flow and price action in between will most likely confuse the prudent investor out of any long position in the Dow.
Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.