The Dow Jones Industrials (DJI) has a very interesting long term chart, particularly the +20 year chart. Between 1998 and 2011, the Dow Jones traded in a sideways pattern, while before and after that period it was in a secular bull market. It is not really fair to say that the stock market is in a bubble right now, although, on a shorter time frame, a bubble view could be visible. Consequently, many believe another aggressive stock market crash is near! This is what the Dow Jones long term chart on 20 years reveals to investors.
[Ed. note: on November 4th 2018 our editorial team added an update in this article. Please scroll down to find the most up-to-date Dow Jones long term chart on 20 years after the October 2018 mini-crash.]
Most investors have the perception that the 2000 and 2007 tops were followed by bear markets. While that is correct from a tactical perspective it is much more ‘nuanced’ from a secular perspective.
That is why it is always recommended to look at long term charts. The Dow Jones Industrials is no exception, its long term chart shows a different picture than the shorter term charts. The longer time frame reveals much more than the short term time frames. Especially the Dow Jones long term chart on 20 years has some great insights for investors.
Dow Jones long term chart on 20 years
The general perception and feeling is that 2007 was a long term top for stock markets. While that is true, from a secular perspective, on a very long term chart, we observe a sideways pattern. Moreover, on the chart below we see a textbook ABCD pattern. What does that mean to investors?
Markets typically move in an A-B-C-D pattern. AB is an upleg, BC is a retracement and CD is another upleg. The following image makes the point (source). The above chart shows an AB upleg until 2000 and a BC retracement between 2000 and 2009. Next, we see an upleg after 2009 (with a real breakout since 2012/2013). So the last CD upleg has started only 3 years ago.
That implies that the potential upside is still considerable. Typically, the legs AB and CD are similar in length.
Although we are not pretending that the Dow Jones will soon trade at 40,000, there will probably be a day that it will be that high, unless things have changed drastically in markets, which we don’t exclude neither.
Obviously, stock markets will correct sooner or later. Our point of view is that the current upleg will be stopped in 2017, but the correction is likely to be a blip on a very long term chart. Look at the 1991 or 2015 crashes, those also look like a small blip on the long term chart.
Dow Jones long term chart on 20 years: up-to-date chart November 2018
This paragraph and below chart contain an up-to-date version of the Dow Jones long term chart on 20 years. We wrote this update on November 4th 2018, almost 2 years after this post was published, as a followup on the Dow Jones long term chart on 20 years findings outlined above.
Especially the October 2018 sell-off in stock markets was vicious. So far, though, the October correction did not damage any long term uptrend. On the contrary, the chart below shows that the uptrend is still intact.
At this point in time the Dow Jones Industrials Index did set a higher low against the February 2018 lows. As long as those lows are respected there is no reason whatsoever to be concerned on the long term uptrend of the Dow Jones Industrials Index.
Dow Jones long term chart on 20 years: the line in the sand
As said in the previous section we strongly believe that the February 2018 lows are the line in the sand. In particular, the 23,000 to 23,500 area in the Dow Jones Industrials Index is, by far, the most important area to watch.
Any monthly close below this area, as well as 3 to 5 consecutive weeks closing below this area, will be a major red flag for U.S. stock markets as well as global stocks.
As long as the ‘line in the sand’ area is respected we may see a continuation of the long term bull market that may have started in 2013.
In other words, the Dow Jones long term chart on 20 years learns that this ongoing bull market (1) may have started in 2013 (2) as long as it continues it might play out similarly to the early 90ies. As seen on the chart above there was plenty of upside potential in 1991. That was a very volatile year, admittedly, but in the bigger scheme of things it did represent a small blip, hardly visible, and a massive buy opportunity.
We are not pretending that we are today in a similar situation as in 1991, but it might be. The point is this: as long as the Dow Jones Industrials continues to make higher lows we are in a bull market. That’s an insight that is based on the long term pattern, and that’s why the Dow Jones long term chart on 20 years is so important, is negates the short term ‘feeling’ or ‘perception’ that an investor might have. It also neutralizes the strong emotions like fear for another 2009-alike stock market crash.
Long term investors are recommended to continue to monitor the Dow Jones long term chart on 20 years to stay on par with the long term trend, and check this once or twice per month, as part of their rituals and research.
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