The Dow Jones Industrial Average (Dow Jones 30) closes slightly in green at 25,444.34 level (+0.26%) on Friday, but stocks closed mixed on Friday (October 19, 2018) after all three US major indices sold off during Thursday’s trading session.
Despite the increase of the volatility in the past three weeks, the macro news flow has been relatively quiet, leaving many market participants searching for explanations.
Procter& Gamble shares soared 8% on Friday after reporting its strongest sales growth in five years. Procter & Gamble was the best-performing Dow stock on Friday.
Market weakness set in back in January 2018, and I think it’s fair to say that the rot started in the emerging markets.
In the US, the semiconductors and then the small caps rolled over, followed by the tech stocks. It seemed that all that was left making new highs was the Dow Jones.
In late September and then again in early October the Dow Jones broke out to new highs, before capitulating along with everything else two weeks ago.
I have built a Point and Figure chart of the Dow Jones over the last years in order to eliminate the market noise. There is a sideways pattern between the support (a level at which the market has tended to bounce) and resistance (a level which the market has banged its head on a few times) where I have drawn the two horizontal lines (blue and red).
The fact that the Dow Jones came down so sharply from its false breakout (bull trap) is a worrying sign and it now looks like a fairly technical double top.
I do not think this is the time that the investors to be buying stocks aggressively. The risk is too high.
In the short term, I expect volatility and whipsawing. Simply the investors should wait and see how the sideways pattern will be solved. If the Dow Jones breaks out the resistance (red line) to new highs, they can buy more aggressively. If the support (blue line) does not hold, then much more bearish scenarios come into play.
The upside target of 21,147 was almost touched back in early October when Dow Jones made a market top of 26,951.81 We do not have another upside active target.
Overall the index prices it would need to break out to new highs, i.e. above last top in early October in order that the bull market continues further.
I have drawn two moving averages based on the P&F chart (13 and 21 SMA). A sell signal is only registered by a double-bottom breakout which occurs after the shorter-length moving average (13 SMA in blue) has crossed below the longer-length (21 SMA in red). But for the instant, it is not the case.
The MACD line was into overbought territory (above 1,000 level) and it is supportive for a downward movement of prices. The technical indicator has sent a sell signal as the MACD line (in blue) falls below its signal line (in red) and it was overbought.