The recent volatility of the Dow Jones Industrial Average has caused some concern among investors. Some are wondering whether this is the beginning of the end. With markets moving non stop higher for so many months, it is not surprising to have many people worrying about a big correction or even a crash.
Let us not look at the markets based on opinion but based on facts. One of the best ways is to use price action. After all price is king and it does not lie. If the trend is still up we should continue to be bullish on the markets. The trend is your friend as they say. So let the trend tell us what we should do instead of our emotions.
One must always follow the trend. If the trend is up we should continue to be bullish till the trend changes. Trend changes happen when the index starts to make a lower high and lower low. So far the Dow Jones Industrial Average has only been making higher highs and higher lows. It has not make any lower highs yet.
Another way for us to gauge the trend of the Dow Jones is to use a trend following method. Using 2 or 3 simple moving averages is one of the best trend following tools available. In the chart of the Dow above, I have input the 20 MA (red), the 50 MA (blue) and the 200 MA (yellow). These incorporate a short term moving average, a mid term moving average and a long term moving average.
So far, the Dow Jones Industrial Average is still above its 20 MA, 50 MA and 200 MA. This tells us that the trend strength is very very strong in the short term, mid term and long term. Therefore, the informed trader or investor should not worry of a crash in the Dow. It is only when the Dow starts to drop below the 20 MA and 50 MA that we should worry about a big crash. As long as Dow stays above the rising 20 MA,50 MA and 200 MA, the investor should expect more new highs.
At this moment, the 26000 area is acting as a price support area as well as a psychological support area for the Dow Jones. As long as Dow stays around this area then we can treat the current sideways movement as a rest. After all stocks and indexes do not go up non stop. After a nice bullish run up, they always need to rest.
In the event that Dow breaks below the 26,000 area, then we need to look at the next support area. This is the 24800 area. There is a consolidation there which will act as support for the market. Therefore, we should not worry about a big crash unless the 24800 area is breached.
Always remember to follow the trend. The trend is your friend till it ends.