Chart Of The Day: Dow Headed For Upside Reversal In The Medium-Term

Despite appearing significantly bearish for some time, and especially since early August when prices fell below their uptrend since the December bottom, the medium-term outlook for stocks has now reversed. This about-face was signaled by the bottoming out of the Dow Jones Industrial Average amid a return to trade talks and global easing.

Still, fundamentally, there's no reason to think that trade will now be satisfactorily solved. And though global central banks and the Fed openly state that they wish to stretch out the longest expansion on record, this doesn't seem reliably sustainable. Friday’s muted stock reaction to a dovish Fed Chair Jerome Powell may imply that the U.S. central bank — along with other major banks — may be running out of ammunition.

This would suggest that prices should fall. But of course, price isn't moved by what should be. It only cares about supply and demand.

The latest bout of trade optimism caused stocks to bounce just as they were close to their lowest level since early June, completing a small H&S bottom. The reversal pattern returned the price above the medium-trend uptrend line since the pre-Christmas selloff.

The 200 DMA drew the line in the sand for bulls below the pattern, while the 100 DMA guarded the neckline. The price created a breakaway gap above the 50 DMA Thursday, demonstrating bulls’ averageness.

Unless we hear of another setback in trade, we expect the price to challenge the July record peak.

Trading Strategies – Long Position Setup

Conservative traders would wait for a new record high to extend the medium-term uptrend before committing to a long position.

Moderate traders may wait for a 2% penetration to above 2,700 to filter a bull trap.

Aggressive traders may enter now or wait for a pullback which typically follows a breakout, to retest the neckline.

Trade Sample