Imminent correction may be preview of greater things to come

February 27, 2017 04:00 PM

While there was a tremendous amount of anticipation and waiting for the Dow Jones Industries Average to surpass the 20,000-point level this winter since it first got within shouting distance of it this past December, once it was breached the Dow has continued to climb and is now approaching 21,000. In fact, the Dow just set a record high close for the 12th consecutive trading session.

When will it end? When will we see a correction?

No one knows, but the Cycle Projection Oscillator, featured every month in Modern Trader’s “cycles” department has been extremely accurate in picking out market turning points. Look at what it forecast for the U.S. Dollar Index and euro in our November issue.

While we typically present a longer-term outlook of the CPO, it is currently showing that the Dow may be close to a short-term top. 

The first panel in the chart above is of a one-hour projection (the green line in the middle is the detrended CPO, the red line is the projection) of the Dow.  It shows that the Dow in near a short-term top. The second panel shows a two-hour time cycle indicating that the Dow could see a substantial short-term drop. The third panel is a four-hour projection. This includes more data and indicates that the Dow is overbought (market breached the top 2-sigma line) and is projected to move lower over the next two weeks.

While the CPO is less precise when looking at intraday data, last panel—overbought and pointing lower—presents a compelling case for a short-term correction.

When you broaden things out longer-term the CPO is forecasting a more stunning development for the Dow later in the year. Stay tuned. 

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.