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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.