Readers of my weekly newsletter EPIC Insights are aware of the frustration this market has been causing me. Since early May, the Dow Jones Industrial Average (Dow) has been trapped in a tight trading range with 8,600 acting as the ceiling and 8,200 serving as a floor (black dotted lines). I have been anxiously awaiting a breakout with the expectation that when the market determined direction, we could trade properly. Initially, it appeared the pattern would resolve itself bullishly, but over the past few days the picture has changed.
A brief move above 8,600 in early June did not lead to breakout. Instead it set the table for a reversal. When the rally failed, we saw the beginning of a head-and-shoulders reversal (blue arrows). As prices fell today and violated the lower end of the trading range, we saw the process complete. From here, prices will be moving lower with 7,600 as an interim price target (red box).
I have long felt that this rally was built upon a weak foundation. If my prediction of a quick fall to 7,600 is correct, we are about to test the resolve of the bulls. Those in the recession-is-over camp now are looking at the Dow nearly 8% below its recent peak. If you wanted a pullback upon which to buy stocks, it is here.
I do not view this as a buying opportunity, but instead as a moment to look for safety. This past week I advised newsletter subscribers to short Brazil and Australia while also buying puts on the Dow. Such actions have allowed us to do well over the past two days despite the markets poor performance.