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

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.