DOW WEAKNESS

The October 2008 fall in the America DOW Jones Index set a potential support area near 8000. The last four months have seen retesting of this general support area. Support is critical in a bear market but we should not ignore the behaviour of the rally rebounds from support. Over the last four months the rally rebounds have developed a pattern of declining highs. The failure of the early 2009 January rally near 9000 established a second calculation point for a new trend line. The first calculation point for the trend line was set by the rally peak near 9600 in 2008 November.

A new downtrend line is drawn on the daily DOW chart. This creates a down sloping triangle. This is a powerful bearish pattern in any market and breakouts from the last third of the triangle can be very powerful. In a bear market the strength of the pattern is increased. The pattern suggests there is a high probability of a downside breakout.

The first feature to measure on this pattern is the height of the triangle. The four day triangle base starts on 2008, October 7, with the drop from near 10,000 to 8000. The triangle height is around 2000 points.

This sets a target near 6000 for any downside breakout from this pattern. This is above long term historical support near 5600. A fall to this level moves the America market into a economic depression.

The down sloping triangle provides a time frame for market developments. The apex of the triangle occurs in 2008 mid-April. This is close to the end of the US tax reporting deadline. The marketing is entering the last third of the pattern development. Breakouts from this sector of the pattern can be very powerful and move very quickly to achieve their target levels.

There are two points of caution for this analysis. The first point is that Pattern analysis on an index is applied with some caution. However, the bearish message of the pattern remains valid.
The second point is the chart pattern on the DOW chart. The pattern is not a perfect down sloping triangle and to a small degree this reduces the reliability of the pattern.

A successful break above the down sloping trend line has a target between 10,000 and 10,600. The measured base of 2000 points is projected upwards from the point on the trend line where any breakout develops.

The test and retest of support near 8000 is not part of a consolidation pattern preceding a market reversal. It is consistent with a bearish down sloping triangle pattern.



To read more articles and commentaries from Daryl Guppy, click HERE

****

Daryl Guppy, well-known international financial technical analysis expert. Appears regularly on CNBCAsia and is known as "The Chart Man". He is an equity and derivatives trader and author of books including Share Trading, Trend Trading and The 36 Strategies of The Chinese For Financial Traders. He has developed several leading technical indicators used by investors in many markets. His weekly analysis newsletters get favorable comment in Asia and Australia.