Dow Hits Key Milestone, Despite Slowing Growth

The Dow is up just 1% for the year, its weakest start since 2010, as GDP expectations continue to be slashed in what has now become a laughable common theme for the first half of each year since the financial crisis.  U.S. (and world) GDP continues to underperform expectations.

U.S. GDP growth for 2014 per the IMF is now expected to be just 2.0%, down from the 3% plus expectation in 2012 and 2.8% expectation as recent as April 2014.

In what was already one of the worst misses by economists ever, first quarter GDP growth still continues to be adjusted downward with the latest estimates now coming in around negative (1.5%).

This hasn’t stopped the stock market from plowing ahead (NYSEARCA:BIB). But as both expectations and stock prices rise, the S&P 500 (NYSEARCA:SDS) is now very close to analysts’ 2014 price projections of $1969.

And now, after a five year rally, the Dow has now reached a very compelling price point.

The Dow Reaches a Key Milestone

The markets have moved in three primary trends since the financial crisis ended in 2009.  For the Dow, the first move lasted 114 weeks from March 2009 to May 2011.  The next move was a 20% pullback over the 2011 summer, ending October 2011.  The market has risen since then with little interruption, the 3rd part of the move.

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But there is a very interesting mathematical relationship occurring between these Dow price moves.

The Dow’s (NYSEARCA:DIA) rise from its March 2009 lows to its May 2011 top took it up 6,264 points, before pulling back 20%.

Since October 2011’s lows, guess how much the Dow (DJI:^DJI) has risen?

The Dow has risen a very similar 6,269 points into the weekend of June 6.  The chart below shows the equality between the two moves.  The Dow has fallen almost 200 points since.

Coincidence?  Perhaps, But, What if It Isn’t?

Many would consider this purely a statistical coincidence, and perhaps it is, but we can still garner some valuable information from such similarities.

First, the initial move from 2009 to 2011 occurred in only 114 weeks.  The latest Dow (DJI:^DJA) rally took 139 weeks to accomplish the same thing.  In other words it took 22% longer for the markets to travel the same distance into the recent top than it did back in the ‘09-’11 rally.

From a market technician’s perspective, this is a sign of a weaker trend and slowing momentum, something we have been highlighting to our subscribers with our numerous charts displaying the technical price divergences occurring at the recent highs.

The initial 6,264 point move also occurred from a much lower price point, making that move when converted into percentage terms much stronger than the latest rally.  6,264 points from a starting point of 6,547 is a 96% move.

The equivalent price move from the 2011 lows is only a 59% gain.

This is another sign the stock market (NYSEARCA:IWM) rally is losing steam.

Still, though, this may just be coincidental and not really meaningful, so what should we really be watching for?

The Initial Rally

The first chart below shows the 2009 to 2011 rally and how a break in the trend just after its May peak 6,264 points later warned a top was forming.  By getting out of the market when that occurred, investors saved more than 15% of drawdown.

The next chart shows the similar 6,269 point move since October 2011 and a similar trendline that has kept the latest market rally (NYSEARCA:SSO) in trend.

A similar breakdown in this trendline would warn that the relationship between the Dow’s recent price high and its similar price move from 2009 to 2011 is more than just a coincidence, something we are keeping a close eye on.

The ETF Profit Strategy Newsletter and our Technical Forecast follows important market trends to keep you on the right side of the trade. We track key market trendlines and price points as our first warning sign market conditions are on the verge of change.