The Dow is still trading in the highly overbought ranges on the daily charts. Ideally, it should let out a decent dose of steam, but it does not have to because it is trading in the oversold ranges on the weekly timelines. The ideal setup would call for a test of the 32,910 range plus or minus 150 points. The markets continue climbing a wall of worry based on the latest sentiment data (posted below). When this occurs, the weekly charts exert more influence than the daily charts. A daily close above 34,281 will be the first signal that the Dow is likely to trade past 34.7K.
The weekly chart of the Dow
If the Dow can close above the 34281 to 34,300 range (preferably the latter) on a weekly basis, it will pave the way to trade to the 35,500 to 35,700 range. The zone of resistance is marked by the thin red line.
Bullish developments
• The Dow traded above its downtrend line. In Aug, the Dow failed to achieve this feat.
• The Dow is currently trading above former resistance turned into support. As long as this line is not breached on a weekly basis, the Dow has a good shot of trading to the 34,710 range with a possible overshoot to the 35K ranges.
• The MACDs experienced a bullish crossover in the neutral zone. When the previous crossover fails to complete the cycle (oversold to overbought and vice versa), the ensuing one usually propels the markets to new highs. The odds are relatively high that the Dow will trade above its August highs.
As long as the Dow does not close below 32,910 on weekly basis, the odds of it rallying to 34.7K and beyond rise with the passage of each day. The Dow is still the most robust index, but the Sp500 and the Nasdaq are gaining traction. If the MACDs on the weekly charts of the SPX, Russell 2000 and Nasdaq experience another bullish crossover, they could collectively trade past their August highs.
- SPX: It could potentially trade as high as 4500
Nasdaq: It could trade in the 13,150 to 13,600 range.
Russell 2000: Potentially, it could trade past 2100
The weekly chart of the Nasdaq
If the MACDs experience another bullish crossover, it will/should lead to an explosive upward move, as the first cycle did not complete. Hence there is still a chance for the Nasdaq to test its Aug highs. A weekly close above 11,850 but ideally 12,000 will likely trigger a new 10% rally. A weekly close at or above 12,000 could push the Nasdaq to the 13,500 to 13,800 range.
One or several indices will most likely not take out their Aug highs, and this will serve as the first confirmation that the second correction, the one we first spoke of last year, is still in play. In other words, the failure of the other major indices to follow in the footsteps of the Dow will serve as an early warning signal that the second correction is not too far in the offing.
Other observations
Interestingly, bullish sentiment is not rising, despite the markets mounting one of the strongest rallies this year. The latest reading is as follows.
Bulls: 27 Neutral: 32 Bears:41
If one just looked at the above data without looking at the indices, one would assume that the markets were pulling back and not rallying. This development indicates that the markets are still climbing a wall of worry, meaning that the odds of our higher secondary targets for the Dow (beyond 35K) have a chance of being hit.
