Dow Jones Index - Where next?

The collapse of the American DOW Jones Index to below 11200 is not a surprise. The head and shoulder chart pattern forecast this result in 2008 January.

The DOW Jones Index has achieved the downside target created by the long term head and shoulder pattern. This target was located at 11200. In a bear market this is the minimum downside target. There was a small rebound from this target level. This target level was also at the same level as the long term uptrend line starting on 2006, September. This trend line has not shown strong support.

The head and shoulder pattern shows the market up trend has ended. The pattern does not tell us how the bear market down trend will end. The historical support and resistance levels show where the market may consolidate and develop a rebound.


Dow Jones Index weekly chart by Daryl Guppy using NextVIEW Advisor.

The previous resistance level in 2004 until 2006 was located near 10700. This previous resistance level may act as a support level for the DOW. In a bear market the previous resistance levels do not provide strong support. The historical support levels created during the market rise are more reliable. The historical support level is near 10,000.

From 2004 to 2006 the DOW traded in a sideways pattern. The top of the trading band was near 10700. The bottom of the trading band was near 10,000. There is now a higher probability that climax selling will cause the DOW to fall quickly towards 10,000. Support near 10700 is not strong.

Climax selling is important because it indicates the end of the downtrend. The climax selling is seen when price falls rapidly and there is very large selling volume. Then the market also recovers quickly, although buying volume is small. This situation does not develop a shaped recovery. This climax selling is a leading indicator that signals the development of a consolidation phase in the market. This phase may last for many months, or a year. The market trade\s in a sideways band.

There will be many individual American companies which will collapse in the next several months. Lehman Brothers fell more than 70% since 2008 February before declaring bankruptcy. The AIG chart has been falling for many months losing 80% of the price value. The recent bad news was also not a surprise to traders who use chart analysis. Many American stock charts show similar behaviour so we know there is more bad news developing.

The good feature of the DOW Jones index chart is the strong support between 10,000 and 10700. This is the area where consolidation will develop and the eventual development of a new uptrend.

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Article contributed by Private Trader, Market Expert, Trading Coach and Best-Selling Author Mr. Daryl Guppy. For more articles and commentaries from Daryl Guppy, click HERE.