After breaking down out of a huge rising wedge pattern last Tuesday, the dow (dow tracking ETF DIA seen above) retraced back to the break point where heavy cumulative volume (see volume by price on the left) seems to confirm strong resistance near $130 (or ~13,000 on the dow). The multi-year uptrend is still clearly in tact, in my view, but stocks are positioned for a correction from here. In just glancing at this chart, a correction to 12,000 looks very reasonable and well within the scope of a longer term (~3 years) uptrend. If you zoom out further you see that stocks have been range bound for about 10 years, and we are near the top of that range. I wouldn't be surprised if something more serious developed than a 1,000 point correction but you can't make a technical argument for that here. I think even the most bullish of bulls would like to see stocks pullback to gain lower risk entries in overextended stocks. With the federal reserve meeting this week, the bears could finally get the catalyst they've been waiting for for the first real decline in stock prices this year. However, should stocks push just a little higher from here, say above 13,060 on the dow, there could be a powerful squeeze as new shorts once again run for the exits. This would set up the dow for a test of the all time highs near 14,000. A correction to 12,000 might be just what the pulls need to muster the strength for a rally later this year towards those highs. We'll just have to wait and see how things play out but caution is warranted in the near term.
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