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

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