Why the Dow Jones Industrial Average Could Hit 20,000 Before Its Big Crash

Comprehensive technical analysis shows the Dow Jones Industrial Average could rally as high as 20,000 before it crashes, in a 1929-style finale.
By Ken Goldberg ,

As the rationalization and denial on the southern tip of Manhattan has spread far and wide, the long-feared initial interest rate hike by the Federal Reserve could become the catalyst for a final pop in the Dow Jones Industrial AverageI:DJI toward 20,000! Although this is not the outcome with highest probability ranking, we can't eliminate it, because the Dow rose back above the the declining tops line (red) connecting the May, June, July and October highs.

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Until the Dow breaks below the August lows, the Dow has the right, but not the obligation, to reach up in uber-maniacal fashion, as the decision support engine's pattern recognition algorithm is illustrating with blue arrows, and tickle the 20,000 level. To be precise, the calculation yields 20,020 in the front-month futures contract (which is now the December contract), and approximately 20,050 in the cash index. This calculation is for the highest extreme of any finale, but is not required to mimic the 1929 precrash peak. All that is required to create that analogue is for a marginally higher high above the May 19 peak. But a mere tick above the May peak wouldn't really allow the bears to throw in their towels and fully capitulate to the good side of the aisle, would it? No, a close above 18,350 would likely bring follow-through buying by those late joiners who historically put the exclamation points on peaks of long rallies, as well as troughs of long declines. So, what is a reasonable middle ground for a manic peak?

Well, if we use some Fibonacci and Elliott Wave guidelines, we can come up with 18,600 as the bull's-eye if Tuesday's low near 17,655 concluded the high-level correction from the Nov. 3 high. If we split the two calculations, the halfway point between 18,600 and 20,050 is 19,325. Therefore, 19,325 +/-387 should be the sweet spot if there is one more wave up needed to conclude the rise from the 2009 low. Timing is not part of the decision support engine's programming, however, so aesthetic balance needs to be used. This is more eyeballing than anything else, although Fibonacci guidelines often repeat in history in regard to time symmetry, too. With this in mind, the earliest window of timing perfection will be into the end of 2015 -- think Christmas +/- 13 days.

Hold your Bloomberg keyboards, though, as the rally scenario to new highs is still the alternate outcome. The primary outcome, which combines the total of the decision support engine's indicators, still leans to a lower high for the Dow and S&P 500 than earlier this summer, leaving the Nasdaq 100 as the only index to print higher highs. This was also the case in early 2000, when the Dow and S&P 500 made highs in January, as the Nasdaq indices went on to peak in March of that year. Broader indices, such as the Russell 2000, Dow Jones Composite (made up of the Dow industrials, Transports and utilities), NYSE Composite, Value Line Composite and Dow Jones Wilshire 4500, are well below the highs of this year. History is clear that fractured markets are not healthy markets, and when the waning volume, breadth, momentum, and relative strength figures are added to the list, the weight of evidence points strongly lower, regardless of whether an index or two can be manipulated to a round number like 20,000.

This daily bar chart of the Russell 2000 futures is a better representation of the herd's actual portfolio than the Dow. Notice the five-wave impulsive decline (pink box), which fell in a Fibonacci 13 weeks of time, contrasted with the three-wave corrective bounce (yellow box), that has risen in a Fibonacci 5-weeks of time, so far. If the higher/darker red oval is tested, even that will likely be within a Fibonacci eight weeks of time, allowing the timing  between peak, trough and secondary peak to relate in an orderly, historically repeating, manner.

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The stochastics' new cross-down sell signal warns the bulls that they should be using 1174 as their protective sell-stop level, which if broken points sharply lower, as the blue arrows illustrate. The data from the decision support engine suggest that only selling actions be taken here, as these are not the conditions that reward buyers, at least not for very long.

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This article is commentary by an independent contributor. At the time of publication, the author held shares of Direxion Daily Small Cap Bear 3X Shares (TZA).

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