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After Dow 26,000, Are Investors Walking Into a Trap?

The Dow's uptrend is accelerating. Should that worry you?

By John Jagerson and Wade Hansen, Editors, Strategic Trader


Source: Shutterstock

The Dow Jones Industrial Average passed another milestone this week by crossing 26,000, just 12 days after it crossed its previous milestone at 25,000 and 47 days after it passed 24,000.

So how long is it going to take to reach 27,000, and should investors hang on for the ride?

The Accelerating Dow

The Dow is passing milestones at a faster rate for two reasons. First, mathematically, it doesn’t take as large of a percentage move in the index to climb from 25,000 to 26,000 — which requires a 4% move — as it does to climb from, say, 15,000 to 16,000 — which requires a 6.66% move.

Second, the Dow’s uptrend is accelerating, as you can see in the daily chart of the index in Fig. 1.

Fig. 1 — Daily Chart of the Dow Jones Industrial Average

While this acceleration can’t, and won’t, last forever, it isn’t currently showing any signs of slowing down.

Sure, the Dow pulled back slightly after crossing above 26,000, but one red candlestick that had a close price almost as high as the previous day’s all-time high close price is hardly a technical confirmation of the bears taking control on Wall Street.

At this point, most investors are likely going to be looking for new opportunities to enter trades, not exit them.

Watching Margin Debt Levels

As we discussed a few weeks ago, margin debt is a measurement of the amount of money traders on Wall Street have borrowed to buy stocks. According to the New York Stock Exchange (NYSE), traders steadily increased their margin debt levels throughout 2017, and we expect that trend to continue in 2018.

As you can see in Fig. 2, the more traders borrow to buy stocks (Negative Balance), the more stock prices tend to go up.

Fig. 2 — Margin Debt Levels and the S&P 500

With interest rates still quite low and gains still to be had in the stock market, watch for borrowing to increase and for stock prices to continue rising.

The Bottom Line

We just started earnings season, and the results have been positive thus far. We’ve seen a few tax-related write-downs from some of the big banks that were larger than expected, but they don’t seem to have bothered traders too much. We expect more positive earnings to continue fueling the bulls.

You can learn more about identifying price patterns and using them to project how far you think a stock is going to move in our Advanced Technical Analysis Program.

InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.

Article printed from InvestorPlace Media, https://investorplace.com/2018/01/after-dow-26000-are-investors-walking-into-a-trap/.

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