Dow looks set for correction

Price at time of writing – 16,008.

Under cover of last Thursday's quiet pre-holiday trade, the Dow completed its move to my long-held target of 16,175, and not one point more. 

The intraday high of 16,175 has seen the Dow complete an anticipated rise of 150% from the unique low it set in March 2009, and it is now perfectly aligned with the S&P 500. The S&P 500 had fulfilled my target at 1791 somewhat ahead of the Dow, and had been protected from earlier falls due to the Dow's unfinished upside business. On hitting 16,175, my recommendation to open short positions on the Dow was also triggered.

The Dow's completion of its rise to this Gann-theory-derived target has coincided with renewed weakness in US ten-year treasury bonds, with the yield closing last night at 2.80%. If I am correct in anticipating that this yield will rise further to 3.5%, this could spell trouble for equity markets generally. Rising US bond yields have an impact around the globe, affecting everything from Australian miners' funding plans to the European housing market. We should not underestimate the inter-market relationships that such a move may cause.

Finally, both the Dow and S&P 500 are aligned as one, and look set to fall in tandem. My task now is to determine the extent of the impending correction. A decline of 8.33% – not an unusual event over the course of the past few years – would take the index back to 14,827, and place it in territory where it resided just last October.  Looking further ahead, a fall of 16.66% would not surprise either, taking the index back to 13,480. 

Recommendation: sell or stay short. Initial target 14,827. Longer-term targets will be defined as we progress.

Dow Jones chart

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.