Will history repeat itself for the Dow?

Price at time of writing – 16,458.

After years of calling for the Dow to move aggressively higher, by year-end my recommendation on the index had reverted to neutral after it achieved my long-held target of 16,175 in late November.

As we enter 2014 and move towards the fifth anniversary of the historic market low in March 2009, I sense the era of easy share-market gains is nearing its end. For the time being, my short-term recommendation remains neutral.

During the past five years I have had three major targets. The first of these targets was at 10,790, duly achieved in March 2010. Once that resistance was broken I introduced a target at 12,940, and this was achieved two years later, also in the month of March. Besides the coincidence that both these major targets were fulfilled in the same month, each occasion also saw the index overshoot these levels by a similar margin of between 3-4% for approximately the same duration (around two months). The Dow subsequently fell by 15% and 10% respectively.

The recent high on the Dow overshot my third target, at 16,175, by a margin of 2.5%. In addition, the index has now traded above target for about a month. The unfolding pattern on the Dow is beginning to look ominously similar to its previous movements, and could be the precursor for a repeat correction in the next couple of months.

Nonetheless, the Dow currently trades above the 16,175 resistance, and we must prepare for all eventualities. A fall below 16,020 is required to confirm a new downtrend. Alternatively, a break above 16,560 would set the market up for another surge higher. Traders need not be involved in this market until one of these parameters is breached.

Recommendation: neutral. Sell short on a break below 16,020. A break above 16,560 would create a short-term buying opportunity.

Dow Jones chart

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