It’s been a good week for the stock market. After seeing more than an 8% correction since September 1, the ASX 200 has bounced back nicely. Back in late August, I warned you in Money Morning that this correction was coming, days before it started. Subscribers of my advisory service, Diggers and Drillers, got the heads-up from me weeks before.
And I’m not confident that it’s over yet.
Last week, I gave Diggers and Drillers readers significant analysis on what stage this stock bull market is at and what to expect in the future. Although I’m likely the biggest stock market bull you hear from — and for good reason — I still see the market correcting into November. This has changed from my initial analysis, where I said the market would correct into late October.
This is a big week for the market.
Tonight’s close on the Dow Jones will set the scene — the Aussie will follow. A strong bounce on the Dow will be a sign that the bulls are back. But if the market sees a strong close down, it will signal that the correction isn’t over. By ‘strong’, think of a bounce around the 1% level.
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Keep your eye on 17,000 points — this is the most important level in the market.
17,000 points is the MAJOR support and resistance level for the Dow Jones. The next phase of the bull market will start when the Dow Jones bounces strongly from this level. It’s unlikely that will happen tonight. Next week? Maybe. But it needs to clear at least 16,900 points tonight for the bulls to be happy.
With that said, I believe that the Dow Jones will close lower tonight. I see the market correcting into November and this week’s bounce as temporary. Stock markets have witnessed a bloodbath since September. They needed a cooling off period — hence this week’s bounce.
Adding to the mix, European bank stress testing results will be out this weekend. And rumour has it that 11 of the 130 banks will fail the test. This means that if another financial meltdown came tomorrow, these banks would likely cease to exist. It will be interesting to see which banks in which countries fail…and to what extent.
The bottom line is that I’m still sitting in the continuing correction camp. If the Dow Jones closes below 16,600 tonight, you are likely to see a new low sometime next month. At this moment, it’s trading at 16,677 points.
Once the market confirms the low, it will turn VERY bullish. I’ve been going on about this for the last few months to Diggers and Drillers readers. Debt markets are dangerous. Next year, you will start to see GIGANTIC capital flows from debt to equity markets. You’ve seen nothing yet.
Now let’s take a look at the bigger technical picture. The chart below tracks the Dow Jones Industrial Index. Each bar represents one month.
I went back to the 1980s to construct the above chart. The support and resistance levels are highly interesting and important. They define the 1987 stock market low, the 1999 tech bubble high, and the financial meltdown high (2007) and low (2009).
Let’s talk about some of the Fibonacci retracement levels…
The 38.2% Fibonacci retracement level acted as resistance from 1999 to 2006. The market just couldn’t go higher until it broke out in 2007.
In 2007, the market jumped quickly to the 50% Fibonacci retracement level and formed the pre-GFC high. The 2009 low retested the 23.6% Fibonacci retracement level that was support during the 1998 Russian bond default and 2002/03 market low.
The chart shows you that the Dow Jones has been in a strong bullish uptrend since 2011.
2011 was the last time the Dow Jones corrected by more than 10%. Given the strength of the market over the past three years and a number of other fundamental indicators, this gave me reason to believe that the stock market would see another correction from September this year.
Since the market broke away in 2011, it’s been in a strong upwards channel. Well, momentum was strong until it found major resistance at 17,000 points — the 61.8% Fibonacci retracement level. You can see this upwards channel by looking at the blue lines.
In my view, the market wants to rejoin the black trend line. This was the trend line that supported the 2002–2006 bull market. This is the trend line that I foresee the market joining in the future.
With all this said, when it hit 17,000 points, it couldn’t break through.
The momentum indicators are still short term bearish. I see the market heading towards 15,629 points. The red horizontal line shows this level.
A fall to this target would reflect a 9.9% correction from the 17,350 point September high of 16,322 points. This would also see the market bouncing nicely off the lower blue channel line.
The bottom line is this: Forget about the day to day volatility in the US stock market. The market is at a major turning point. We are in the midst of the greatest stock bull market in history. Buying quality stocks now will not be a mistake.
The types of stocks I spend my days researching for Diggers and Drillers readers look set to skyrocket in the bull run through 2015.
Jason Stevenson
Resources Analyst, Diggers and Drillers
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