Dow in risky territory after bear squeeze

Price at time of writing – 16,221.

Although the Dow rallied back to a new intraday high last week, after the Federal Reserve began scaling its ultra-loose monetary expansion, it remains an extremely high-risk trade at the moment.

Indeed, it would not be surprising if last week’s gains were quickly eroded once the year is over. Nonetheless, if you were stopped out on the rise above 16,250, I suggest that you remain sidelined for the time being and wait patiently for a lower-risk opportunity to arise.

The juggernaut-like bull market we have enjoyed over much of the past five years will not end without a fight. There are many emotions at work after such a stellar run, and I have touched on some of these in today’s German DAX report. Typically, a significant high will only form after first creating a double- or triple-top pattern. The Dow will probably need to travel that well-worn path this time around too. But, as the old saying goes, it is better to feed the ducks while they are quacking, and I am very comfortable in selling stocks while this ‘buy-the-dip’ mentality prevails.

Last week’s rally displays all the features of a classic ‘bear squeeze’. Markets were probably positioned with many open ‘shorts’, and a less-than-feared taper was just the trigger to cause a stampede to close out. I have added a line on today’s chart, positioned at 16,558, that reflects a 12.5% rise from last October’s minor low. It provides a glimpse of where the Dow may go on an overshoot of my 16,175 target, and we should watch closely if the index reaches this level.

Recommendation: neutral. Sell short on any further break below 16,023. The refined target will then become 14,931.

Dow Jones chart

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