The US stock market trades at elevated levels according to many metrics. Companies are overvalued, as both growth and value investors bid for the same names.
The big tech companies reported strong earnings last week, reflecting the flows that keep pouring into the US stock market. Apple capitalization, for instance, is bigger than the entire German domestic shares ($1.8 trillion versus $1.7 trillion). Tesla’s capitalization exceeds the five European car makers’ capitalization combined.
Investors’ enthusiasm is sustained by the cheap money from the Fed. Fractional shares investing also led to a strong inflow into the equity market as a record number of retailers opened new trading accounts.
The key event for the Dow Jones this week is Friday’s NFP data. If the labor market shows signs of further recovery, it may be just what the Dow Jones needs to break out of the pennant formation.
Dow Jones Pennant Formation
The current consolidation forms above a critical support level. A possible breakout opens the road to the pennant’s measured move that extends well beyond the all-important 30,000 level.
To trade it, the entry is key. Therefore, the first thing to do is to wait for the price to break the upper trendline. Equally important, wait for a daily close above that trendline. That is the signal that the pennant broke to the upside.
Next, place a stop-loss order at the previous higher low during the pennant’s formation. Finally, aim for the measured move, which is big enough to generate an appropriate risk-reward ratio.