The Dow could be nearing a historic top

April 17, 2017 09:00 AM

The Cycle Projection Oscillator (CPO) is a technical tool that uses complex algorithms to filter multiple cycles from historical data, combines them and gives a graphical representation of their predictive behavior. The CPO methodology employs proprietary statistical techniques to obtain cyclical information from price data. Other proprietary frequency domain techniques then are employed to obtain the cycles embedded in the price.

KBW Nasdaq Bank Index

The banking sector has had a nice run since the presidential election as the CPO showed the KBW Nasdaq Bank Index (BKX) in oversold territory leading to what could have been a profitable short despite an overall uptrend. Now, the CPO is indicating the BKX to turn lower, and is indicating it is close to overbought territory. The CPO shows the BKX dropping to an intermediate low in May, before a mild recovery and then a more dramatic sell-off this summer. 

Euro FX

The euro currency has been extremely volatile the last few quarters and the CPO does not show any relief in sight. 
By mid-March the euro was trading about 400 basis points above its late 2016/early 2017 double bottom low, but the CPO shows this mid-March level as a market top and expects the euro to turn lower and take out its yearly lows. However, this low, which the CPO expects to hit in May, should be an extremely strong buying opportunity as it indicates the euro will rally in late spring through the summer. The rally should be substantial, possibly challenging the 2016 highs and peak in August or September. 

Dow Jones Industrial Average

A couple of months ago the CPO indicated that the Dow Jones rally had a bit more upside would be nearing an end in the spring. There was a lot more to the rally than the CPO indicated but it is now showing that it has definitely peaked and will turn lower. The CPO weekly chart shows a slow decline that will accelerate further, later in the year. While the weekly chart shows an interesting projection for the Dow, when we broaden the picture into a longer-term view the outlook gets quite scary (see “This could be a big one”).

About the Author

John Rawlins is a former member of the CBOT with more than 30 years of experience in trading and research. He co-developed the Cycle Projection Oscillator, which has been featured in Futures and numerous research reports, with an aerospace engineer to identify the dominant cycles in a data stream and project them into the future. Reach John at johnrawlins@msn.com. @cpopro1. You can reach John at johnrawlins@msn.com.