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Broken Dow Trendline?


Careful analysis shows market cusp.

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Editor's Note: Professor Collins submitted this piece yesterday in response to the chart posted on the Buzz and Banter, mentioned below. The analysis was done prior to this morning's Fed action.

We've drawn a number of trend lines over the years…some admittedly better than others. Tuttle Asset Management has also devoted a great deal of time to study the technical action of the Dow Jones Industrial Average (INDU) over the past 100+ years, building on Kevin's excellent technical framework.

There is no question that there is some interpretation involved in charting. Still, I wanted to take a moment to respond quickly to the earlier Buzz and Banter post about the Dow breaking the uptrend from 1982 on a monthly chart.

At this critical juncture there is no room for confusion about where the trend lines truly lie. In our very humble opinion, it is extremely dangerous to attempt to draw a trendline from 1982 with the second point 20 years later in 2002. From where we sit, that would appear somewhat arbitrary and essentially forcing the graph to fit the analysis. That is always a challenge for technicians who attempt to devise meaning and direction from lines.

Click to enlarge image

Looking back over the long run the Dow broke out topside in 1984 through its horizontal resistance. The long-term trendline should begin there following the break. On that basis you have a much more meaningful line since it tested it 7-8 times over the course of 20 years. That line was in fact broken back in 2002.

Click to enlarge image

Once it was broken we have to review the analysis depicted below (the current cyclical bull market) for clues as to the technical state of the markets. We have converging upward sloping and horizontal support at ~11,700. In our view, if we break that level, then we will have experienced a true break on the Dow. That's rapidly approaching so perhaps this distinction is terribly small and potentially moot (we think in all likelihood it probably is). But anticipating a break is a dangerous game for a short-term trader utilizing technical analysis.

However, in general we still have to be careful to draw trend lines precisely. Otherwise we risk the possibility of drawing some very dangerous conclusions along with those lines.

For further information on TAM's technical study of the Dow please review our most theory update from April 27th, 2007.

We have also updated the 100+ Year Dow Chart through 2007 which can be viewed here.
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