Will Dow repeat the sell-off in 2020?

THE Dow Jones Industrial Average (DJIA) saw exponential growth since the recovery from the Great Recession in 2008.

Since then, the index soared from 6,470 to 31,000 over the years to record a 395 per cent growth for a compounded annual growth rate of 13.95 per cent.

Furthermore, the upside saw a strong extended wave (3) between 2011 and 2018, which was supplemented by three tranches of Quantitative Easing (QE) followed by the taper tantrum in 2015.

Despite the end of the QE programme, DJIA created a second sub-set of wave (3) in 2018, which displayed the strength of the US stock market.

2017 also saw the DJIA rolling into a corrective wave (4) which saw the rebound happen after 2018's Christmas. In the following year, DJIA made its mark by breaking new highs and broke the 29,000 mark during the new year of 2020.

Hopes were on the DJIA to break the 30,000 level in 2020; however, the Covid-19 pandemic which started in February saw strong daily gap down below the 28,063 support level which indicated that the strong selling pressure was over.

Moreover, it broke out of 2019's rising wedge/ending diagonal of wave (5). Fortunately, the sell-off lasted for about a month before prices rebounded from the low of 18,591 points.

Today, the DJIA continues to edge higher with a strong bullish gap, also known as a runaway gap, above the key resistance turned support level from 28,845-29,580 region.

However, the momentum will remain sluggish as it continues to move upwards.

The first chart depicts the wave movement from 2009 to 2021. The great 10,000 points drop formed a 3-wave down which represents a 3-sub wave structure of wave (A). The continued upside from March was the potential wave (B) which was perhaps the expanded flat/running flat formation. Besides that, the movement of wave (B) resembled a rising wedge which was the ending diagonal in 2019.

Hence, there remained a threat whereby the Dow can continue to make new highs; however, the bullish momentum is wearing off. The maximum level it can reach is the region between 32,000 and 33,000 before a sell-off begins.

Should the above-mentioned scenario pan out, the minimum support the Dow will reach is around 25,000, which is the minimum target of wave (C) for the running flat.

Alternative wave count

Looking at another set of wave count on the second chart, it generally has the same direction as the first chart. The only difference is that wave (5) is still ongoing now in 2021 and wave (4) is represented by the expanded wedge as shown in in the chart. It was also mentioned in a previous Chartpoint dated July 29, 2019 and the rebound could happen near the lower end at the 18,591 region as well.

Looking at both wave analyses, the DJIA is heading for the last push before a major correction.

However, the question is what level it will reach and when the correction will happen. Will we repeat last year's levels or will the Dow continue to break higher highs? It all depends on the next resistance level - 32,000.

• The writer is technical analyst, Phillip Securities Research

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.

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