My regular readers will realize that I have been bullish on Dow Jones since early October 2017. I publish a stock market analysis almost daily on this website. Each day we try to figure out what the Dow Jones is telling us and where it is likely to go. I did mention that the month of October and November this year would be one of the best periods for Dow bulls. As we end the month of November and enter into the final month of 2017, let us recap and look at why Dow had a super bull run.
I feel like I'm a magician who is now revealing how the trick is done.
But for those who are observant, the stock market always shows its hand and tell us where it wants to go before it happens. We just need to open our eyes and observe. Some people see with their eyes but they do not register the information. Hopefully, this article will open up your eyes and mind to the art of knowing where the stock market is likely to go.
An index that rises from 22400 to 24000 in 2 months is an incredible feat! For the year, the Dow Jones Industrial Average has risen from 19900 to 24000. That's an almost 20% rise in a single year and that in itself is something to celebrate.
Now, why did the Dow Jones rise so much in October and November?
I think the answer is quite simple. It all boils down to this favorite Wall Street maxim or proverb "The Trend Is Your Friend". You see, many investors and traders have crack their brains trying to figure out what is the stock market's next move or what is a stock's next move. But many fail to see that the trend is all you need to figure out.
A stock or index can be in 3 types of trend:
An uptrend is defined as a series of higher highs and higher lows. Basically it is very easy to spot a stock or index that is in an uptrend. They will be moving from the lower left of the chart to the upper right hand side of the chart. They are moving up and moving higher.
That is what the Dow Jones Industrial Average has been doing for the past 11 months since January 2017.
The above is a daily chart of the Dow Jones Futures since January 2017. Notice how the index has been in a nice uptrend since the beginning of the year.
The theory behind "The Trend Is Your Friend" is when an index is in an established uptrend, it will continue to move higher until the trend changes. The trend change will happen when the index starts to fail to move higher. Notice how the Dow Jones is able to move higher after each correction.
A trend change also happens when the index starts to make lower highs and lower lows. As you can see from the chart of Dow above, the index has not yet made any significant lower high. Every time after it corrects, they just continue to make higher lows. Dow has also not made any lower lows.
Thus, that is the reason why I remain a bull in Dow Jones. Since Dow is still in a nice uptrend, we should continue to remain bullish in Dow and we should not change our mind until the trend changes.
Breakouts are bullish continuation patterns that often appear in uptrending stocks or index. When a stock breaks out of a consolidation, it means that the bulls have won the battle. A breakout is often followed by a rise or a nice bull run upwards.
In the chart of the Dow, we can see that Dow broke out of 2 consolidations. The first one happened in mid September 2017. When it broke out of the consolidation, it told us to be bullish. The consolidation will also act as a support for Dow in the event of a correction in the future.
Notice how the Dow Jones drifted at the top of the consolidation after it broke out. Sometimes a bull run does not happen immediately after it breaks out of a consolidation. As long as the index stays above the top of the consolidation, then the breakout is still valid. After some time, Dow started its nice bull run especially in the month of October. October is a very significant month and we shall see why it is so important later.
The second breakout from a consolidation happened a few days ago. From around mid October 2017 to late November 2017, Dow Jones consolidated. Meaning it traded sideways.
A period of sideways trading after a nice run up is actually very healthy. Picture a runner taking a break after running non stop for 1 hour. The break provides a period of rest for the runner where he or she rests a while and sip some water. After the rest, the runner is refreshed and continues to run upwards. The same thing happens also to stock market indices.
After taking a rest, Dow is now refreshed and breaks higher.
If you read my work regularly, you will realize that I love using the 20 MA, 50 MA and 200 MA. Moving averages are trend following tools and if you use them correctly, you can often spot important trend changes. It also gives you the patience and confidence to ride a trend higher.
You can use any moving averages that you want. I just like to use the:
When an index is above its rising 20 MA, 50 MA and 200 MA, it tells us that it is in a very strong trend. Notice how the Dow Jones stayed above those 3 moving averages most of the time. In the chart above, the 20 MA is the red line, the 50 MA is the blue line and the 200 MA is the yellow line.
Dow Jones stayed above all 3 moving averages most of the time and it is still staying above them at the time of this writing. Therefore, we should continue to be bullish on the Dow Jones.
From around mid September to the end of November, Dow has been staying above these 3 moving averages. Which is why Dow moved from 22000 to 24000. It is a simple tool to use, but a powerful one. Most people would like to have some complicated research to tell us why the stock market is going up or down. But experienced traders will always tell you that simple trend following tools often works best.
Seasonality plays a big role in the stock markets. Actually they play quite a big role in many other markets as well. One of the ways that we can know about the seasonality of the US stock market is to hop on to Stockcharts.com Seasonality Page and key in the Dow Jones Industrial Average to find out about its seasonality.
I find them very useful. When you study seasonality, you will realize that the stock market performs better in certain months and at certain times of the year they do not perform that well.
Seasonality Chart Courtesy Of Stockcharts.com
The image above is the seasonality chart of the Dow Jones Industrial Average. This is the 5 year seasonality chart of the Dow Jones. You can increase or decrease the number of years using the slider but I choose 5 years which is the default. I think 5 years of data is good enough. Not too long and not too short.
You can see the % of times that Dow Jones closed higher for each month. The month of February, April, May and November has the Dow Jones closing up 100% of the time for the past 5 years.
The month of October has a 80% chance of closing higher for the past 5 years. The average gains for the month of October and November are significantly higher than most other months except the months of February.
When I look at the data here, I became quite bullish on the stock market. Coupled with the fact that the Dow is in an uptrend, these data gives us confidence that the Dow Jones will most likely have a nice bull run.
Well, there you have it. Here are the reasons why I became bullish on Dow Jones for the month of October and November. What about December 2017? Well, the Dow has a 50% chance of closing higher in December and with an average gain of 1.2% over the past 5 years. Since the trend is up, we should remain slightly bullish. Remember always, the trend is your friend. Respect it and be familiar with it and you will be able to get things right the majority of the time.
Charts with the Freestockcharts.com label are courtesy of Freestockcharts.com
Charts with the investing.com logo are courtesy of Investing.com powered by Trading View
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