The Dow – 2020 Upside to 30,350; Risk of Bear Market Under 27,400

The Dow has upside to annual and semiannual risky levels at 29,964 and 30,361 in the first quarter. Failure to hold its first-quarter value level at 27,432 warns that a bear market correction will occur in 2020.

The Dow Jones Industrial Average ended 2019 with a bull market gain of 22.3%. Strength at the open for 2020 continues this bull run with upside to my annual and semiannual risky levels at 29,964 and 30,361, respectively.

Near term I show a January value level at 27,579 with a weekly risky level at 28,990 through Jan. 3. My first quarter value level is 27,432. The problem for the bulls is that there are no value levels below this key level which expires at the end of March.

The Daily Chart for the Dow

The horizontal lines are the monthly and quarterly value levels

The horizontal lines are the monthly and quarterly value levels

Courtesy of Refinitiv XENITH

The daily chart for the Dow shows that the index begins 2020 above a “golden cross” that formed back on March 20. This bullish buy signal occurred when the 50-day simple moving average rose above the 200-day simple moving average. 

The close of 28,538 on Dec. 31 was an important input into my proprietary analytics. This resulted in a January value level at 27,579 and a first-quarter value level at 27,432 which are the horizontal levels on the chart. 

Above the chart are annual and semiannual risky levels which are price targets at 29,964 and 30,361, respectively. This is a gain of just 5% to 6.4%. The downside risk in the first quarter is 3.9%. 

The problem is that below 27,432 is risk to the 200-day simple moving average, which is rising at 26,740. This would be a decline of 6.3%. 

Since the “golden cross,” the 200-day SMA was crossed several times in 2019.

The Weekly Chart for the Dow

The weekly chart shows the 'inflating parabolic bubble' formation

The weekly chart shows the 'inflating parabolic bubble' formation

Courtesy of Refinitiv XENITH

The weekly chart for the Dow is positive but extremely overbought with the average above its five-week modified moving average at 28,152. 

The 200-week simple moving average or “reversion to the mean” is at 23,112 and rising. This positive trend was last tested during the week of Feb. 12, 2016 when the average was 15,819. 

The 12x3x3 weekly slow stochastic reading is projected to end this week at 94.95. This reading is well above the overbought threshold of 80.00. It is also well above the 90.00 which I consider an “inflating parabolic bubble” formation.

Eventually the weekly chart will become negative. This occurs when the average closes below its five-week MMA with the weekly slow stochastic reading trending below 80.00. If this happens with the average below the quarterly level at 27,432, the downside risk is to the 200-week SMA. This would result in a decline of at least 19%.

How to use my value levels and risky levels:

The close of 28,538 on Dec. 31, 2019, were input to my proprietary analytics and resulted in new monthly, quarterly, semiannual and annual levels. Each uses the last nine closes in these time horizons.

New weekly levels are calculated after the end of each week. New monthly levels occur after the close of each month. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an “inflating parabolic bubble” as a bubble always pops. I also call a reading below 10.00 as being “too cheap to ignore.”

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.