Ides of March

The Dow Jones Industrial Average (DJIA) has had a great six months — and an even better week.

As you can see by this chart, it has broken above its resistance levels and is in a solid uptrend.

What I don’t like about this market is that volume is decreasing.

When stock prices are going up and volume is decreasing, it suggests a trend is unlikely to continue.

Prices may still go up at a slower pace, but once selling starts (which is ironically signaled by a surge in volume), prices will fall — and fast.

This rally is driven by free Fed money passed through institutions. The retail investor has been selling for years. This whole “you can’t fight the Fed” mentality is pushing the market higher.

There is a MACD crossover (bottommost indicator on the chart), but it is above the zero line, which means it is a weak indicator.

This is in contrast to the MACD in 2009 that signaled the start of a 7,000-point run, as you can see in the ten-year chart.

Ten-Year Dow

Here is a chart of the last decade (each candlestick represents a month):

The market is already above the highs made during the dot-com era.

The Dow is now in the tough slog against the 2007 all-time high of 14,164.53. But again, volume has been falling since investors puked out their shares at the bottom of 2009 in what is called a capitulation low.

How can a market double on falling volume?

Well, the Fed prints money. We saw the same thing in 2003 when Greenspan slashed rates and increased liquidity.

Will the Trend End?

We’ve now had six quarters of white candlesticks. White means the trading period ended higher than it began. Red means the period ended lower.

Trends tend to run in three to five candlesticks. If you move beyond five, you are living on borrowed time. Don’t get me wrong; sometimes they run for eleven candlesticks.

In 2006 you can see a pattern of seven upticks. This run was followed by a big red candlestick and a 1,000-point drop… and finally, by a 2,000-point run to the top.

We are now 957.56 points from the Dow’s all-time high.

The VIX sits on resistance:

The VIX is a contrary indicator. Volatility is low when stocks are high. As you can see, the VIX gapped down to the bottom.

The upshot is the charts suggest that within the next 957 points, we will see a correction.

The Dow has about 7.4% upside here — with a good chance of a 10% to 15% correction back to 11,000 and change within the next three months.

How to Play It

The most simple and secure way to play it would be to take some money off the table.

If you’ve been in this market throughout the correction, you should be close to breakeven. If you’ve been buying, you are well ahead.

Many people who have held are at breakeven. They will be quick to sell when the computers take over the trading on a down day. It’s always good to lighten up before machines destroy the prices and they halt trading.

If you like a little more risk, try the Direxion Large Cap Bear 3x ETF (BGZ).

It goes up three times what the Dow goes down. How’s that for a contrary chart!

Above is the three-year chart.

Here is the same ETF over the last ten days:

Think of BGZ as an insurance policy: You pay car insurance, but you still don’t want to be in an accident…

If the Dow blows through its all-time highs and goes to 20,000, your BGZ play won’t matter because the rest of your portfolio will have made money.

If the Dow craters, your BGZ will move up — and you’ll have some cash to buy cheap stocks at the bottom.

Have a great trading day,

Christian DeHaemer

Check us out on YouTube!

Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.

P.S. I’d like to give a shout-out to the fierce Greyhounds of Loyola University Maryland who made the NCAA Men’s Basketball Tournament for the first time in 18 years. Look out, Buckeyes!