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

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. 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. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Find articles by analysts

This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. 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. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.