As the Dow Jones Industrial Average turns positive for the year, one trader said its charts could indicate an even bigger breakout.
Ascent Wealth Partners Managing Director Todd Gordon pointed to historical patterns as a guide for its next move.
“With so much talk about how overdone this market is, how we’re in a bubble, I want to take a step back, show you a couple price patterns, give you context of where we are in this current market with a little bit of a history of the Dow,” Gordon told CNBC’s “Trading Nation” on Thursday.
In particular, Gordon is looking at a three-step long-term pattern he says the Dow is currently following.
“First you get a little bit of a profit-taking sell-off, you make a low, then the pullback buyers and value investors start to come in, and we go above the prior highs. Then you get some breakout guys, some momentum guys, then the market, in its sick and sadistic ways, sometimes it will go back down to try to go back and shake out the people who bought the highs,” said Gordon.
Then, once the market has moved back down, it will reset and resume its prior trend, he explained. Understanding the pattern, he said, prevents investors from making an emotional decision based on the day-to-day churn.
One prominent example, he said, was during the 2000 tech bubble. This gave way to the 2002 and 2003 lows, followed by a new high during the housing bubble, another low during the credit crisis, and then the markets moved back up again.”
“We have the same pattern again. Okay, so we go down into the end of 2018 … then make a new high, we go down to the March lows making a new low, convincing everyone that we’re going to get a sustained bear market, and now look at what the market is doing,” said Gordon.
Though the Dow is on the path to record highs, Gordon sees it still within a period of consolidation. He sees a band of resistance setting in at 30,000 on the Dow which, if broken through, would mark a resumption of the broader breakout higher.
The Dow closed Friday at 28,653.87, up more than 160 points.
