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Dow Jones not as healthy as it seems

The Dow Jones Industrial Average index, one of the best economy barometers, has been flirting with the $17 000 mark during the last two weeks, but was unable to reach it. With the majority of investors becoming more and more optimistic about it, getting above 17k is only a matter of time. But then what? Anyone who has spent enough time on the market knows, that no trend lasts forever. While the crowd is replacing optimism with mania, the phrase “proceed with caution” seems appropriate for any Elliottician. On the chart below you will see an Elliott Wave labeling of the whole uptrend, which started from the bottom of March 2009 and is currently in progress.

dow jones big 1

As you can see, at this stage the weekly chart of Dow Jones cannot be counted as impulsive. The rule states, that if you are unable to count an impulse, it must be some kind of a correction. In this case it looks like a double zig-zag, labeled (w)-(x)-(y), where each wave consists of three waves A-B-C.

Recommended reading: Elliott Wave Patterns

In zig-zags, waves A and C are impulses. If you look at the above chart one more time, you should see that wave C of (y) is probably forming its fifth wave, which should bring the whole sequence to an end. In order to be more accurate, we will examine the daily chart of Dow Jones, where this fifth wave is visible in details.

dow jones daily

According to the Elliott Wave Principle, fifth waves could develop as a regular impulse or as an ending diagonal. Once again, since a five-wave sequence cannot be counted so far, we will go with the ending diagonal scenario.

Recommended reading: Ending Diagonal? What is this?

Each wave of this particular pattern has a three-wave structure, most commonly of the zig-zag family. Waves 1 and 3 of the presumed ending diagonal have already fulfilled this condition. If this is the correct count, we should wait for wave 4 down, followed by wave 5 up, which could finally bring prices above $17 000. However, there would be no reason for a party, because ending diagonals usually are an early sign of a “swift and sharp” reversal ahead. The bigger picture forecast looks like this:

dow jones big 2

Trying to determine how far to the south prices could go is a risky task, but in all cases, we would not want to be buyers, if Dow Jones reaches $17 000.

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