How Much Higher Will The Dow Go?

The Dow Jones Industrial Average is up 5.9% already this year and it has hardly paused for breath. The question is, how much higher will it go?

The Trend Is Your Friend

Market participants, particularly those adopting a trend following strategy, often use the expression “the trend is your friend” and I believe this is as true today as it has ever been.

If you were to stand back and examine the global macroeconomic landscape you could be forgiven for thinking that investors were crazy for putting their money into the stock market (more on that tomorrow). The fact is however, global stock markets are in an uptrend and I believe it would be foolish to stand in their way.

As the chart below shows, the Dow has established a tight up channel and has also taken out its May 2011 high. This means that those who were short back in 2011 (and there were plenty of them) have been forced to cover.

The next major resistance level for the Dow is around 13,058 – a level last tested in May 2008.

A 14 Month Chart Of The Dow Chart courtesy of Stockcharts.com

This second chart shows the RSI, CCI & Williams %R technical indicators, each of which is showing (circles) that the index is nearing overbought conditions.

A 14 Month Chart Of The Dow Showing Technical Indicators Chart courtesy of Stockcharts.com

Just because the index is looking a little overbought doesn’t mean that a correction will happen right away, in fact I expect the advance to continue to around the 13,050 area before we see a correction or consolidation phase that will last for a month or two. This consolidation will likely bounce around between 13,050 and 13,000 and may well trace out a classic Elliott Wave ABC Zig-Zag.

I then expect the Dow to continue towards the old high it made back in October 2007 at around 14,093. In my opinion this won’t be a year when the old adage ‘Sell in May and go away…’ plays out. In fact, I wouldn’t be surprised to see the Dow make a new all-time high, at least in nominal terms.

How To Play This Move

If I didn’t already have a position I would be reluctant to chase the Dow at these levels and would wait for a bit more of a pullback towards the lower end of the channel. A retracement to around 12,890 would represent a good entry point for the continuing advance.

I will talk about what’s driving the market tomorrow.

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