In our last dedicated update on the Dow [see: July 2019 Update], we noted the intersection of a number of overhead resistance features in its chart and offered some thoughts on its downside potential if it managed to reverse.

Note that our 18974 target represents a backtest of the red channel from which DJIA broke out and backtested between 2014-2016 as well as the white 1.618. A May 2020 bottom at 18974ish would align nicely with the SPX 2138 target indicated by our analog.

I posted my charts on July 29 (the yellow arrow) and was roundly cheered when he Dow cratered 7% over the next two weeks, even closing below its 200-DMA……and was loudly jeered when it made that up and went on to new all-time highs. I’ve seen this sort of thing so often from the Dow that I was pretty hot under the collar. I’m pretty sure an older (yes, there are a few) wiser colleague took me aside and muttered “Forget it, Pebble, it’s the Dow.”

So, I did. You see, when it comes to manipulation the Dow is the all-time champ: share price weighted, with the ability to kick out losers and slide in winners whenever you like? How is this even an index?

When the market reversed on cue in mid-February [see: A New Day, Same Old Nonsense]  I don’t think I even checked to see where the Dow was (the blue arrow below.) I’ll admit I got curious when it closed below its 200-DMA on Feb 25. But, I didn’t inhale. I stayed focused on real indices, cratering oil prices and the bond market.Well…guess where it landed today?  Go ahead.  I’ll wait.

You guessed it. Right where our July 2019 forecast said: the bottom of the falling red channel where it intersected with the top of the rising red channel and the 1.618 Fib extension at 18974. It’s a 33% drop from stem to stern. You can’t make this stuff up.

Knowing we have a global pandemic on our hands and a minimum of a quarter of negative GDP ahead of us, surely it’ll keep going, right?  I mean, did you hear Bill Ackman today?  Hell is coming!  So, the Dow is positioned for a bounce.  That’s right.  IF oil and gas can continue bouncing, and IF USDJPY can pop up through its SMA200 and IF VIX breaks down and IF the 2s10s craters back below 48 bps, then DJIA will definitely probably bounce.  At least a little.

continued for members…

The only good thing about the DJIA is that the charts go back a long ways. Here’s a monthly chart dating back to the depression. A couple of things to note.

First, DJIA reached its 2.618 extension (in 1965) before reversing very much. It retreated and tested it again and again and again until finally falling to backtest its 1.618. At that point, it tested the 2.618 a few more times before finally breaking out for good in 1982 – 17 years after first reaching the 2.618.  That’s insane (and, probably explains why the index has been manipulated so much since then.)The other thing to note is that the red channel is the only one that’s really legit. The white channel from the 60s is just a lame construct that was created by connecting the 1982 and 2009 lows and stretching up to include the 1999 highs. It works fine from 1982 on, but is meaningless before that. Therefore, lame.

But, if you look closely, you can see that the 2003 lows and the 2020 highs tag the midline. So, someone considers the white channel legit, which means that if the red channel top backtest doesn’t hold, we could easily see the 1.272 at 16300 backtested.

That would obviously mean a breakdown of the rising purple channel from 2009 – which is reasonably well-formed.  It would also obviously mean a breakdown of the 1.618 Fib which, if 2020 is anything like 1970-1975, is a level that TPTB will defend to the death.

Will it happen again?  Well, note that the 1.618 Fib at 18974 is the same one that DJIA broke above when Trump won the 2016 election. So, while Dems might celebrate the market gods taking away the main object of Trump’s boasting for the past 3 1/2 years, you have to assume that Trump and his Republican friends might not be too thrilled with this outcome.

You might even assume that Trump and friends will do anything and everything in their power to reverse things. This, of course, brings us back to the question of the day: what will happen to COVID-19 between now and November 3?

If a vaccine or treatment materializes like magic and it just goes away, like a miracle, it’s easy to imagine stocks will rebound sharply. If it turns into an Italy type affair and millions of us start dropping in the streets…not so much.

These are the charts to watch – all the pieces that need to fall into place for a meaningful and lasting bounce to occur. You can bet Trump was on the phone today making deals with Abe, Putin and MBS to ensure that oil and the USDJPY continue bouncing. If those things play out overnight, VIX will almost certainly break down and the Dow can pile on a couple thousand points tomorrow. If not, a repeat of 2007-2009 would put DJIA down around 13,600 — back below the 2007 highs. Live by the algo, die by the algo.

Stay tuned.