Is a DOW top in place?
The Dow looks like it is finally building a topping formation based on several key charts I’ve been watching very closely. The weekly charts have told us for a long time where to look for some kind of intermediate top to form based on the 2007 H&S top. First though, we’ll look at the daily Dow chart to see the first bit of evidence that is suggesting the topping process is well underway.
With the crash last week and reversal off the lows, was the beginning of what maybe a very large H&S top formation. The daily charts shows our small H&S pattern that broke down just a day before the big crash. No way could anybody have expected what was to follow on the breakout of that small H&S’s top (i.e. the “flash crash”). It signaled a trend reversal but not a full fledge crash.
My instincts, after the crash bottom, was to to connect the two most obvious lows I could find. When you take out so many minor lows that is usually a sign of trouble. The chart below is the daily look and the small H&S top with what I was hoping to see, a backtest all the way back up to the neckline of the small H&S top. Yesterday we achieved that price objective, so the counter trend rally off the crash low was now complete. I’ve sketched in how I thought things might unfold going forward. So far so good.
One more thought on the daily chart above - I have labeled the bigger H&S top as an unbalanced H&S top formation. The reason for this is that if you look at the left shoulder, (i.e. the blue bull flag) on the way up, it took about 3 weeks to complete. With the crash last week, we took 3 weeks worth of price action and condensed it down to one day thus making it an unbalanced H&S top.
Now it’s time to build a case as to why the small, daily H&S top formed where it did. There is an old adage in TA that says, old necklines never die they just slowly fade away. I’ve used that adage many times in the past and it still amazes me how well it works in predicting future support or resistance areas.
The next chart is a long term weekly Dow chart going back to the 2002 bottom. Below you will notice the 2007 top and the two necklines (NL’s) I used when we were creating that big reversal pattern. I had a strong feeling that those 2 NL’s would come back into play at some point in the future, that is the reason I was looking for some type of topping pattern, (i.e. the daily H&S top) to form in that general area. Also, our H&S bottom in 2008 suggested a price objective up to that area adding more evidence to the big picture. Also notice the MACD at the bottom of the chart showing a positive divergence at the 2008 bottom and the negative divergence now in place in this topping area.
The next chart (monthly) shows the 61.8 Fib retracement from the 2007 high to the 2008 bottom. Again, right where we wanted to see it in conjunction with our neckline extensions and the small daily H&S top.
One last chart to complete the big picture. We have shown the bearish falling channel on the VIX for a long time now. The “flash crash” last week broke the VIX out through the top of the channel leaving no doubt that a breakout had accrued. Notice as the Dow has rallied back up to our neckline on the small daily H&S top the VIX has backtested its breakout from the falling channel top rail.
Keep in mind that this potential big H&S top is not complete yet. We have to break the neckline in order to confirm the big pattern. Technical Analysis is all about gathering clues to be able to make an educated guess as to where we are and where we might be going. Nothing is 100% for sure in the markets as last week’s plunge showed. We shall see in the fullness of time how this analysis plays out and if raising cash is a good idea at this time.
All the best….Rambus
