Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Charts: Dow Now Facing Critical Level


Looking at logarithm-based charts, it appears the bull has reached the edge of the pasture.

When looking for the big-picture story the market is trying to tell, regular price charts can sometimes mislead. This is especially true with regard to price behavior around trend lines and other chart geometry. For the big picture, with a time range spanning a decade or more, it's sometimes helpful to refer to logarithm-based charts of price over time. Seen from that perspective, the Dow Jones Industrial Average (INDEXDJX:.DJI) may have finally reached the edge of its range.

Clearly the index is recognizing the resistance of the long-term trend line on a log scale. On the other hand, the price bars and trend line on the conventional monthly chart shown below make it appear as though price is forming a breakout move -- something we believe is unlikely.
In addition to the log-based trend line, this season sees the beginning of coinciding downtrends in two very long-term cycles for this index, one of which extends as far back as the 1930s. (The cycles aren't shown on the chart.)

The conventional monthly chart shows the pattern our firm believes is slowly unfolding -- an Elliott fourth wave expanding triangle that has lasted more than a decade and that is not yet finished. If that interpretation is correct, then the next big-picture development should be for price to move to a new low slightly beneath the "crash" low of 2009. That move will probably take at least two years to complete.

Even if the large Elliott pattern turns out to be something other than a big triangle, it's still likely that nearby resistance combined with market cycles will produce a sizable correction in 2014, and possibly beyond. Note also the negative divergence developing between higher price highs and lower momentum readings on the monthly chart -- a sign of exhaustion in the market. The danger signal from momentum carries over to the weekly time frame as well.

We believe the Dow is tracing an ending-diagonal pattern, which can be seen on weekly and daily charts. If price moves decisively below the lower trend line for the diagonal, as shown on the weekly chart below, then expect a relatively swift move to test the longer-term channel boundary, which will pass near 15,630 around the end of June. More detail about the possible ending diagonal and nearby resistance levels can be seen in the daily Dow chart on our website.

This article originally appeared on Trading on the Mark.
< Previous
  • 1
Next >
No positions in stocks mentioned.
Featured Videos