While the U.S. and Europe await some key economic news during the next few weeks, the Dow Jones Industrial Average is severely overextended and is pushing against resistance. Traders who are still long in relation to major stock indices should consider whether they really want to be positioned at the upper edge of this chart whenthe news hits.
The economic events we’re watching include:
- nonfarm payroll data on Friday, Dec. 2
- Italy’s referendum on Sunday, Dec. 4
- the European Central Bank’s monetary policy meeting on Thursday, December 8
- the Federal Reserve’s announcement about interest rates on Wednesday, Dec. 14
The downward trend in treasury bond prices signals that the market believes the Fed will raise interested rates soon – perhaps this month. In fact, if any of the news items are interpreted as “bad news” for interest rates, it could serve to jolt stock indices out of their upward trend. Even positive NFP data could have that type of negative effect.
In terms of pattern, it is possible to count the Dow as being at or near completion of five-wave upward patterns on several time frames. On the monthly chart included here, note how the index is showing negative momentum divergence even as it presses against resistance from Fibonacci-related measurements and harmonics of the upward channel.
Even though it is very risky to expect the upward trend to continue, it still might be too early to get bearish. For initial confirmation of a real bear market developing in the Dow, we would need to see major supports break. Falling beneath 19,000 would be an initial bearish signal, and a break beneath 18,260 would be even more significant.
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