US DOW DEPRESSION

The most dangerous chart pattern in a bear market is the down sloping triangle. This pattern is seen in the America DOW Jones Index and it sets a downside target near 5600. The rapid fall below 7800 confirms this target.

This chart pattern develops when there is a well defined support level. Above the support level is a down sloping trend line. The support level is created by the people who want to buy shares. When price falls to this level buyers enter the market. The down sloping trend line is created by people who own the shares. They are worried about the future so they are ready to sell. When each new rally fails to move higher these shareholders lower the price they want for their shares. The result is shown as a down sloping trend line.

Over the last five months the rally rebounds 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 and this creates a down sloping triangle. In a bear market the strength of the pattern is increased. The first feature to measure with 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 7800. The triangle height is around 2200 points.

Using chart pattern analysis, the downside target for the America DOW Jones Index is near 5600. The long term historical support level is near 5500.

This combination of factors suggests there is a high probability the market will quickly fall towards support between 5500 and 5600. This is a 61% fall from the peak of the Index in 2007, October at 14198. This degree of fall is similar to the degree of fall in 1929 when the America market collapsed and developed the world depression.

The market may develop a temporary rebound from below 7800. The market has two resistance barriers to defeat. The first is the strong support level near 7800. This is now a strong resistance level. The second resistance feature is the down sloping trend line. Currently the value of this trend line is near 8500. The market must be able to move above this trend line to show any true bullish strength.

The end of this triangle pattern develops near the end of 2009, April. There is a high probability the America market will develop a continuation of the downtrend with a slow move towards support near 5600.



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

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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.

Dow Closes Higher

The US market started off with a bearish momentum amid rising fears of recession and ended up in a strong bullish note especially in the last hour.

Sweet crude oil fell US$4.69 to close at US$69.85 a barrel on NYMEX, the lowest price since 23 August last year. Investors are hoping lower energy prices will leave more money for consumers to spend.

Although investors are still bearish about the outlook of the financial markets, traders who look for short term opportunities started to enter the markets when the selling pressure ends in the morning. These spurred the market up and the Dow Jones Industrial Average (DJI) shoots up to close 401.35 points higher than the previous day's close. The DJI ended at 8979.26 points, 4.7% higher.

The DJI went as low as 8,197.67 points and as high as 9013.27. There's a 816 points range or 10%. expect the market to continue its volatility as investors and traders speculating whether the equity market will be supported by the government help.


5-minute DJI chart for 16 October 2007, using NextVIEW Advisor

Meanwhile, investors are still seeking safety in their investments as treasury bills are still in demand. On Thursday, the three-month old Treasury bill yielded about 0.50%. It yielded 0.20% on wednesday.

Markets may remain volatile, but the fact is that the bears are still in control in the long run and until a strong consolidation phase takes place, the market is expected to be pulled down by the bears.

N.I.N.E.

Investors Vote of NO Confidence

Investors all around the world are pessimistic about the current economic situation despite optimism shown in governments. Central banks in Europe including the US have aggressively approved hundreds of billions of dollars to bail out ailing finance companies in hoping to ease the deteriorating financial and economical situation around the globe.

Those who still think that the economy would not go into recession is still in wonderland. Those who bought equity and properties last year wished that they should not have invested last year. We are currently only seeing the mortgage crisis affecting the financial markets but what we have not seen yet is the business, automobile and credit card loans which somehow will be a crisis if the economy goes into deep recession.

New economy data include drop of retail sales by 1.2%, higher than the 0.7% predicted by analysts, as reported in AP news. This made it clear that the consumers are more careful in their spending. Light, sweet crude oil fell $4.09 to settle at $74.54 per barrel on the New York Mercantile Exchange, a 13 months low. Price of Crude Palm Oil fell RM107 or 5.8% to close at RM1,743 per metric ton, currently at a price level 2 years ago.

Goverments are trying to cut spendings on developments and concentrate on developments that are crucial only. In Malaysia, the government is looking to relook at stop some projects. This may cause even more concern for the economy. In Singapore, a planned US$24billion petrochemical investment has been delayed because they are still not able to close its project financing.

Yesterday, the US benchmark index, the Dow Indutrial Average shed 733 points or 7.9% to close at 8577.91 points, almost wiping out the two days gains. The lowest close last week was on Friday at 8,451.19. In the Asian region, reaction was mixed but generally lower. Markets in this part of the world is expected to fall sharply amid the fall in the US and European market.

Investors have passed a vote of no confidence and expect the financial markets to fall lower and remain volatile.

Article contributed by Private Trader, Market Expert, Trading Coach and Chief Market Strategist of Nextview, Mr. Benny Lee. For more articles and commentaries from Benny, click HERE.

How to Buy Low and Sell High (Candlesticks introduction)

Candlesticks charting technique has been used for many centuries in Japan and only made popular to the rest of the world a few decades ago. The technique has become more popular among traders as it provides easier identification of chart patterns as compared to the conventional OHLC bar chart.

The principles of the technique are simple. A candlestick chart uses the same as a conventional bar chart but provides more set ups and visually easier to identify. The broad 'body' of the candlestick is drawn between the market's opening and closing prices, like the line on a bar chart only thicker. “Shadows”, or lines, at either end extend to the session's highs and lows.

The body is then filled/coloured to show market direction – filled/black (or blue) blue if the close is below the open, hollow/white (or red) if prices close above the opening level. (See figure 1)



Steve Nison, the west's leading exponent of the method, says there has been an explosion of interest in North America and Europe in the past few years. "Candlestick trading techniques have become one of the most discussed forms of technical analysis in the trading community, both (in the U.S.) and abroad," he says.

The candlestick pattern formation can provide 3 major set ups – the price reversal, continuation and uncertainty. Price reversal is the most important and widely used set up. One of the reason why this technique is so interesting, apart from it being the value it provides in analyzing price actions, is because of the terminology used to describe the set up. A hammer candlestick pattern looks like a hammer on a candlesticks chart is a bullish reversal pattern and a Harami (bullish or bearish) is a two candle formation with a previous candle body much bigger than the current candle body, hence its name Harami, or pregnant lady. (See figure 2).

I have been using Japanese Candlesticks in my trading strategy and it’s far one of the best technique. The candlesticks technique can be applied on all trading instruments including stocks, index futures, commodities, warrants, options and so on. Let’s observe how it magically works on Malaysian stocks. First of all, let’s take a look at Tebrau's chart.



Upstart and Counter Attack on the Tebrau chart above (See figure 3) are bullish price reversal patterns while Engulfing Bear and Bearish Star are bearish reversal patterns. There are also other minor candlestick patterns on the chart like Doji, spinning tops etc. but they are not so significant. Doji patterns are uncertainty patterns and spinning tops are baby star patterns.

Observe that the bullish and bearish reversal patterns occur on most of the reversal points. These are one to two day candlestick patterns and therefore they provide quite fast signals. Most traders use these patterns as an early signal to detect price reversals and confirm with other technical indicators.

If you know about Candlesticks, you could buy Tebrau at about RM0.90 when there is an UpStart pattern, sell at about RM1.80 when there is an Engulfing Bear pattern and made a whopping 100% profits in just about 2 months. You could also make money buying at the Counter Attack pattern and sell it when a Bearish Star pattern shows up.

The candlestick patterns can also be applied on other time frames like the longer term weekly chart (See figure 4), or the short term minutes chart. This enables traders to use them to achieve short to long term objectives.

On the weekly chart below DIGI provides an opportunity for investors to buy when price went into a correction and then sent a Bullish Star Signal on 9 of September. Price then was about RM20.00 and five weeks later on the 24th October 2007, DIGI’s price stands at 24.00. It was a 20% move.



Candlesticks patterns are sometimes not detected on price reversals, but once the pattern is detected, the reversals turn to significant rallies. Therefore, traders can rely fully on candlesticks for entries but cannot rely fully on exits because they may not appear when the price starts to turn to the opposite direction. Other indicators are needed as back up for exiting a trade that was initiated by a candlesticks pattern.

It takes some creativity and research to combine candlesticks patterns and other technical indicators such as support and resistance, Fibonacci, Oscillators and trend studies to get good entry and exit signals. They can be used as a powerful trading strategy once combined with risk and money management.

Article prepared by Benny Lee