Dow Jones Industrial Average crash; Is A Crash In The Works

Dow Jones Industrial Average crash

 Dow Jones Industrial Average crash in 2018 or 2019

Experts only serve to muddle the outlook. It’s not even 2018, and there is already a slew of articles stating that the markets are going to crash in 2018.  What is amusing is that these very same individuals have been making the same prediction for nigh on ten years.  You would think that by now they would have had some sense knocked into them; especially since they have taken such a massive drubbing. No such luck, the same experts keep mouthing the same nonsense hoping desperately for a new outcome.

Has anything changed Since Our Last Update?

Well, yes, things change on a daily basis, but the underlying trend is still up, and overall sentiment is far from Euphoric.  On a technical basis, the markets are extremely overbought and begging for a reason to let out some steam. However, just because they are overbought does not mean they have to pull back.   Take a look at the chart of NVDA.

Experts warn of stock market crash coming in 2018

NVDA Looks Interesting

The stock has been trading in the overbought ranges for an extended period, but it refused to pull back and instead continued to soar higher and higher.  The moral here is that extremely overbought markets do not have to pull back; they can continue trending higher.   If the Dow takes a similar path then it could easily trade to 25K before pulling back.

The stock has been trading in the overbought ranges for months on end. Note this is a weekly chart, each bar represents a week’s worth of data.   This is just one of many stocks that are all exhibiting the same pattern.  Now it is easy to state that one should sit out and wait for a pullback. Many have been waiting for this proverbial pullback for two years and running.   In such a market, one needs to adopt a two-pronged strategy:

Only invest in strong companies that are trading in the oversold ranges. Granted this is not an easy task but with a bit of effort you will find a decent list of candidates

Secondly, invest half the amount of money you would have invested a year ago.  The markets are extremely overbought so erring to the side of caution would be prudent

Example of An Expert That’s Wrong All The Time

His record is so abysmal that he makes a broken clock or a moron look like a genius. He says exactly the same thing every year in the hopes that he might be right; a clear example of insanity in action. According to him, the Dow Jones Industrial Average crash should have crashed long ago, So far the only thing crashing is his ego.

Dow Jones Industrial Average crash; Sentiment Readings Don’t validate this outlook

In the last article we made the following comments:

Ask a madman how he is, and he might respond by telling you that “ the road needs to be fixed”.  The answer has nothing to do with your question and on the surface has no pattern whatsoever, but if you turned around and looked at the road, maybe you would notice that it is in need of repairs. All you had to do was alter the angle of observance, and in doing so, you spotted something that most would have missed.

Well, nothing has changed since then. This Bull Market is unlike any other market and those that don’t understand the basic concepts of Mass psychology will continue to be left in the dust.  Until the mass embraces this market with a passion, the market is unlikely to crash.  The Dow Jones Industrial Average crash song is a myth, for until, the masses embrace this market, it will not crash.

Stock Market Forecast 2018; Crash Unlikely A Stock Market Crash In 2018- Low probability event

The Technical outlook

 Dow Jones Industrial Average crash 2018?

Without a doubt the markets are overbought, and we can see this when we take a look at a five-year chart of the Nasdaq. But as we saw in the case of NVDA, markets can remain irrational a lot longer than most players can remain solvent. One of the best ways to identify market turning points is to pay attention to the crowd; when the crowd is euphoric a top is close at hand and vice versa.

Ideally, the Nasdaq lets out some steam and drops down to the 5500 ranges; such a strong move would scare the living daylights out of the masses and create a wonderful opportunity. However, for this to occur the following sequence would be needed

  • The Nasdaq would need to close below 6500 on a weekly basis, and this would lead to a test of the 5900-6000 ranges.
  • To trade lower, the Nasdaq would need to close below 5950 on a monthly basis.

At the Tactical Investor, we focus on two factors

Mass sentiment and our custom technical indicators, the most important of which is the trend indicator.  If Crowd is not bullish and our indicators have pulled back to the oversold ranges, the intensity of the pullback would not matter.

So will the stock market crash in 2018?  That outlook is highly unlikely, though a strong pullback can’t be ruled out and it would be something that we would wholeheartedly embrace.  Until this bull market is embraced widely strong pullbacks should be viewed through a bullish lens.

Dow Jones Industrial Average crash Possibility in 2019?

The unexpected factor is that no one would have expected this to occur in a rising market.   In the 1st week of Jan, the Dow was trading in the 23,000 ranges after having dropped below 21,500 towards the end of Dec 2018. For the record, those holding out for a “crash-like scenario” might be sorely disappointed, as crashes occur when the masses least expect.  The sharp pullback in Dec 2018 was something most did not expect as the markets had already pulled back from Oct to Nov 2018 and the follow-through caught many with their pants down. Now everyone is expecting a strong move and what they might get is a minor pullback. Extracted from May 7, 2019, Market Update 

When the SPX is trading well above its 99 EMA (exponential moving average), it either pulls back or consolidates. The pullback or consolidation, in turn, pushes our indicators towards the oversold ranges and then we can take on higher levels of risk. Our risk to reward models adjusts entry points based on the current state of the market.

Secondary Indicators

This falls under the category of secondary indicators, and we don’t place too much value on them. They are good for detecting small anomalies but are almost useless when it comes to determining the trend.  Most of these secondary indicators like this one are suggesting that the markets are trading in the extremely overbought ranges.

On the monthly charts, the markets are still trading in the oversold ranges, so all strong corrections have to be viewed through a bullish lens.  A Dow Jones Industrial Average crash is a low probability event.  What will happen is that many investors will mistake a stock market correction for a crash and in doing so dump quality stocks for next to nothing. If there is Dow Jones Industrial Average crash type event, jump in and buy, for the long term trend is still bullish.

Dow Jones Industrials Crash Update Oct 2019

PermaBear losing option according to Dow long term chart

This bull market is unlike any other; before 2009, one could have relied on extensive technical studies to more or less call the top of a market give or take a few months; after 2009, the game plan changed and 99% of these traders/experts failed to factor this into the equation. Technical analysis as a standalone tool would not work as well as did before 2009 and in many cases would lead to a faulty conclusion.

Crowd behaviour is not pessimistic (experts, your average Joes and everything in between) and until they start to embrace this market, most pullbacks ranging from mild to wild will falsely be mistaken for the big one. Permabear; It takes A Special Kind Of Stupid To Be One.   Hence the Dow Stock Market Outlook going forward is that the astute investor should embrace all sharp pullbacks.

Tactical Investor Alternative Dow Theory

According to the Tactical Investor alternative Dow Theory, if the Dow utilities trade to new highs, it is a good omen of things to come. In other words, the Dow industrials will follow the same path sooner or later. The Dow utilities surged to new highs in September and as a result, the Dow industrials and transports are expected to follow suit.  The transport sector is expected to outperform the overall market.  We are looking at both IYT and XTN as possible future candidates and we might even add TPOR to our list but it will be placed under the secondary candidates and will be labelled as a high-risk play (3X leveraged ETF)

Huge amounts of money have left the market indicating that the crowd is panicking at precisely the wrong time. History indicates that whenever the masses panic, opportunity is usually around the corner. Hence the only one that is going to take another round of beatings is the masses.

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Nasdaq’s Achievement Topples Stock Market Crash Argument  (Oct 5)

Stock Market Crash 2018; Another Buying Opportunity  (Oct 5)

Masses Trained to fear Market Crashes; why not embrace them?  (Sept 27)