Equity Indices: Key Levels To Watch

The DJIA (Dow Jones Industrial Average) has retraced more than 38.2% of the latest decline in two strong thrusts and is consolidating the second 4-day wave up. The only pullback (Jan 3rd) was short-lived and suggests that while (downward) counter moves remain limited to a single day or two, the next region of interest is located up near 24.5K, where the key range midpoint and 50-day MA lie.

That said, corrective dips within a medium-term recovery phase such as we're in right now can suffer deep pullbacks towards the low before eventually resolving further strength. The fact is, however, that we haven't seen that as of now, but that the potential always remains.

If subsequent dips were to break cleanly below 23.4K, then the wave-count will have to shift negatively and a potential large lower top could be setting-up.

The previous two turning points that marked the end of the November and December rally both ended in exhaustive-style thrusts that marked big up days that ended at or near the highs, only to be quickly followed by big reversal days. Again, we have not seen this either, but rather a sort of melt-up type advance thus far.



The S&P 500 (chart below) is in the same situation as the Dow with the highlighted region to watch located at 2638/2642, where its 50% retracement and 50-day MA coincide. Similarly, the bullish wave-count would be at risk if the 2500 region were taken-out to the downside.

Strategy: Buy Dips (DJIA/S&P 500)

VIX: Watch The 200-Day Moving Average

Volatility has settled substantially since Christmas and has just dipped below its 50-day MA to probe the 20 threshold as of this writing. This exposes the 200-day to a re-test as seen back in November and December (now in the 16.68 region). If, however, this key support fails to hold, then the base formed (in the 10 to 12 region) between last year's volatility spikes will be targeted.

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