Dow Jones Contract in Review

Last week I wrote about some of the finer details of the Dow Jones $10 multiplier contract, traded at the Chicago Board of Trade (CBOT) . Just a quick note for those who did some sums regarding risk when trading this contract, there is also a $5 multiplier and even a $2.50 multiplier, which are electronically traded ‘mini' contracts. This brings trading movements in the underlying Dow Jones Industrial Average Index using futures, within the reach of most speculators who have acquired even a minimal starting stake. But, it is a requirement that you have a plan, regardless of your leverage level.

In the last article, I hinted that it looked likely that there was more down to come before we see any further upside on the Dow . Well history goes to show the market has fallen away quite significantly over the past few days and the Dow Jones Index is poised to break strongly to the downside. It will only take a couple of weeks now for the verdict to be only a matter of retrospect.

Chart 1 shows some analysis on the market action following the top on the DJ-SpotV chart, which came in on February 19, 2004. Our focus will be on how the analysis came together to pinpoint the recent 10265-spike top, the last high before the market has begun cascading away. The first point to consider is when looking at the range from the February high (10750) to the low in August (9775). The 50% retracement level for the range is 10262.5 ((10750 + 9775)/2).

The second part of the analysis that came together, was the Pressure Point, using the last significant upside range. The market ran up from the August low (9775) to the early September top (10362), giving us a range of 587 points. The subsequent low was 9970 in late September, adding 50% of the 587 point range to this low, gives us a 50% Danger Zone of 10263.5 (9970 + (587/2)). If the numbers are starting to get hard to follow, refer back to the chart. The final part of the analysis is looking at percentage retracement of the range from 10362 to 9970 (392 points). The 75% retracement level for this range is 10264 (9970 + 75% of 392 points). What a fantastic cluster, we have 10262.5, 10263.5 and 10264. The top came in at 10265!

Frank Tubbs, would define this pattern as ‘Head'. A Head implies that the market has been undergoing distribution and is getting ready to break to the downside. The warning signs appear clear, however the market will do what it wants to do. We could find ourselves with some potentially highly profitable trading opportunities on the short side of the Dow, and by using stops, keep our risk well under control.

The market has run down close to 100% of the previous downside range. Also, you will notice that each time the market has broken a previous significant low, a bounce to a lower top has occurred (as represented by the arrows). If the market bounces to a new lower top and heads south strongly again, the break could be underway. For now, some caution would be in order, until the chart gives its’ next indication.

Until next week......

Noel Campbell