Much-anticipated Dow correction begins

Price at time of writing – 15,837.

It took a little while to arrive, stopping out my original short-sell recommendation in the process, but the correction I have highly anticipated since the Dow fulfilled my long-term target at 16,175 has begun.

Last week’s recommendation to sell the index short on a break below 16,020 has been triggered. Today I will seek to establish the likely downside targets.

History will record the recent high as being 16,588, some 413 points or 2.5% above my target and resistance level of 16,175. I tend to think of these market overshoots as ‘money-box moments’, when supremely confident retail investors empty their collective money boxes, draw down their cash accounts and plough the proceeds into an ever-increasing share market. There is no doubt in my mind that December and January represented such a moment.

As we enter the high-risk equity environment I have warned about recently, it will be a particularly difficult time for emerging market economies. In my view, the first mistake that some nations may make is to raise interest rates to support their currencies. Increasing interest rates to stem a falling currency could exacerbate embedded deflationary tendencies, ultimately making the situation worse. I believe those nations that realise the futility of such actions will emerge better-placed in the longer run.

I am anticipating that the Dow Jones will fall by 12.5% from its recent high, taking the index down to 14,515. This would align the index with a clutch of other Gann-theory percentages and time-angles. Expect interim support along the way in a band from 15,551-15,606.

Recommendation: stay short. Add to short positions on any rally that retests 16,175. The target now becomes 14,515.

Dow Jones chart

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