Dow holds back ahead of tapering

Price at time of writing - 16020.

Although a determined pull-back on the Dow was expected upon completion of my upside target at 16,175, the urgency of the fall early last week was still quite unnerving.

With the quantitative easing (QE) taper surely approaching, and as ten-year US Treasury yields increase further to 2.86%, we should prepare to see an increase in volatility across all global equity markets.  Stay short on the Dow Jones and US ten-year Treasuries.

As we rightly appreciate the many boats floated as a result of the US Federal Reserve's experimental monetary policy, we should not get overly negative about the imminent tapering of its highly successful QE operation. This should certainly not be viewed as an interest rate increase (this remains a long way off), but merely as a means to drain the financial system of excess liquidity. As the market transitions to a less accommodative policy, this too will throw up other opportunities along the way. 

In a sign of transition to a slower pace of incline, the Dow has broken below both the short- and medium-term rising time-angles, highlighted on the chart in red and blue respectively. We also sit just below the bottom of the broader resistance band defined as 16,023-16,186. Although the market could well test 16,175 again, evidence shows that this band will prove a tough nut to crack.  Nevertheless, should the Dow prove me wrong and immediately break above 16,186 I will be working to determine in advance where the next upside resistance band lies. 

Recommendation: Stay short. Initial target 14,827. Stop-losses can be activated on strength above 16,250.

Dow Jones chart

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