IN DEPTH LOOK AT THE DOW - by Rambus
In this post of the Dow Jones I would like to start with the short term time frames and work out to the longer time frames as all the action over the last several weeks has painted 2 completely different scenarios over the short term. The 30 min look ($INDU - 30min chart) shows in detail what has happened after the breakout from the 6 point rectangle pattern.
The breakout was somewhat lackluster in its move out of the rectangle but managed to move forward after 2 backtests of the top rail so all in all things looked good at that point for higher prices. After struggling to really gain some traction with a nice technical pattern like the 6 point rectangle consolidation pattern it became very obvious when we had our second reaction off the small double top, that really can’t be seen on a daily chart, that this rally maybe in trouble.
The dashed black rail (chart above) shows the double top formation so the next place to look for support was at the top of the rectangle which we got rallying up to the area of the right side of the pattern now signaling a H&S top could be forming if we failed at the 10,600 area. What we ended up with is an unbalanced H&S top sitting right on top of our beautiful rectangle pattern. Symmetry plays a big role in how i look at charts. I was actually looking for one more small bounce off of the top rail of the rectangle but the Dow had other plans that said, I want to go lower and I want to go lower now!
This is the market talking to you if you care listen and not tell it what its supposed to do. Anyway you can see the waterfall decline that ensued after the top rail gave way which should have been very strong support. What is also interesting about the 30 min chart is the way the bottom rail of the rectangle couldn’t hold support on Friday, a very weak sign. As you can see the Dow is extremely oversold at this point and a small counter trend rally should occur back up to the bottom of the rectangle or possibly as high as the mid rail within the rectangle that has acted as support and resistance during each rally phase within the rectangle.
Next I would like to step back from the micro to look at the 60 minute chart to put that whole 30 minute chart into perspective. As you can see from the 60 minute look ($INDU - 60min chart) it appears we are breaking down from a bearish rising wedge pattern where the rally becomes narrower and narrower until it just finally ran out of gas. The rectangle and small double top along with the small H&S pattern all acted in concert to form a topping pattern at the end of the bearish rising wedge. Again the Dow is very oversold down here and some type of counter rally should be expected now - but the stage is being set for further weakness to come in the weeks ahead.
Now we step back even further in time to the daily look ($INDU - daily chart) so you can see how the bearish rising wedge and the little topping patterns on the 30 minute chart all tie in together. Also note our rectangle price objective at 11,167. That is what we have been shooting for to end this particular leg up off the bottom. It looks like we fell shy of our price objective but with Technical Analysis you can spot the top being created even if your price objective is not being met.
Just listen to what the market is saying and you will be in good shape, its when you are rigid in your thinking that the markets will take you to the woodshed for another hard learning lesson. There is other info on the daily look that you can examine from a TA standpoint to grasp how TA works, looking and interpreting chart patterns.
One last chart of the weekly linear look ($INDU - weekly) to put the whole ball of wax into something that might make some sense. There is a lot of TA on this chart going all the way back to the 2002 lows. Its uncanny how similar the 2 big bottom bases from 2002 and 2009 look, including the rally that followed the breakout of the H&S bases. Some might say that the TA failed because we apparently fell just shy of the brown area of our price objective based on several different patterns, but in my mind, the TA kept going long and strong right up to the last week or so when we started showing weakness on the 30 minute chart. So at this point it looks like we have begun our long anticipated correction to the down side.
I hope these charts can show those that are interested in Technical Analysis that they can be used as early warning to a trend change and that is what its all about. Trying to be the first in line when there is a big trend change because that is where you will be first in line to buy your stocks and the first in line to sell your stocks for a profit. The long term holders of stocks can suffer immense pain during corrections and I’m not into pain.
I would like to show one more 60 minute chart of the gold proxy ($GLD - 60min) as a follow up to my post the other day showing the A B C correction in more detail. For the record, I have no positions in gold stocks either long or short. The backtest to the H&S top neckline, wave B up at 113 was my signal to get out and wait for a better buying opportunity closer to the neckline. You can see a bear flag formed immediately right after the backtest to the neckline. We broke the bottom rail of the bear flag with a gap completing the pattern. Again this is just a detailed look at the minute charts that can give you a heads up when something is reversing.
My trading partner, Xiphos, has put together a very detailed look at another strong possibility that deflation could be in the makings right now. He goes in depth and makes some very strong arguments for another round of deflation - and an interim top for gold prices and gold stocks as well. As we are short to intermediate traders all possibilities are open in our book as we don’t try to tell the markets what to do but listen very carefully for direction.
All the best…..Rambus
