Anyone out there interested in discussing the answer to the question “where to next?”, for the Dow Jones? Yes! We will address that question this week. But before we do let’s do a brief recap of the past few months.
It was fairly obvious to any thinking person from the beginning of this year that the conflict in Iraq was inevitable. The U.S. and UK governments had positioned troops and artillery in countries surrounding Iraq and they weren’t there for group therapy or some R and R!
Most have heard the saying, buy the rumour and sell the news, for trading into a top. The bear market scenario is the opposite way around – sell the rumour and buy the news. Well the news of the potential conflict in Iraq and the sell off into early March once again proved the old adage true.
The Dow rallied over 1,000 points from the 12 March low and it took only 9 days to do it. So for the short-term, that put the market back into a potentially overbought position. Some consolidation may have been needed before the market could make any further, sustainable moves upward. The Dow has looked like presenting us with some juicy double and triple tops to trade. Now having the opportunity to speak with traders as the story of the markets unfold, there were those keenly watching these tops for short trades. Strictly speaking the Dow has made double and triple tops, but there has been no real reward in trading these tops. How could we have foreseen that? That will be addressed shortly.
The sentiment in the market has been mixed; news of SARS and the potential gloom for corporate profits in the U.S. may have been enough to make you keen to sell if you got caught up in the emotion of the news. If some consolidation (buying) is to be done, some persistent uncertainty helps the cause!
In Chart 1, let’s take a closer look at a simple but powerful basis for analysis that would have suggested that you weren’t likely to see much for your efforts in selling on the double and triple tops. Also, more importantly now, use this analysis as a basis to determine perhaps, where to next for the Dow.
Chart 1
On Chart 1, the triple tops have been labelled 1, 2 and 3 and the lows following the tops have been labelled X, Y and Z. (Using A, B and C might have caused far more confusion than necessary.) When analysing the chart with emphasis on these key points, we see that low X is a higher bottom to the 12 March low. Then low Y, the low following top 2 is higher again. Finally low Z is higher once more. Although we have had successive equal tops, the whole time we have seen rising bottoms, indicating rising support. The time spent coming down from each of the tops has also been decreasing.
What does this mean for the market? I’ll be watching for a break out on the long side. Those who recall the article from Trading Tutors Issue # 3 would remember the emphasis placed on successive closes above the resistance level before getting too keen on buying, that rule alone would have kept your powder still dry up until now. The pressure is building though and things should be about to give. Remembering that support becomes resistance and resistance becomes support. If the market breaks aggressively to the upside and the risk blows out for entering on the second or third consecutive close, be careful. The market may always come back to retest the resistance level and find support offering other opportunities. However, we need to see this close filter satisfied before any of this becomes reality. Ultimately the market will do it’s own thing.
The key point to take with you from all this is that there is sometimes genius in taking a simplistic view, letting the market tell it’s own story and being able to read the signs.
All the best with your trading and analysis,
Noel Campbell