Bears Take a Swipe at the Market

Mar 1, 2008: 10:54 AM CST

Friday saw the market make a large volatility move down, and the impetus has now shifted to the bears it seems.

Let’s look at the daily Dow Jones chart:

Notice that the market faced major resistance at the 12,800 level, and despite the potential triangle break, the bears could not push the market higher.

I zoomed in on the most recent action to introduce two points:

  1. The recent triangle that everyone saw (red) has FAILED as expected by many professionals. When everyone sees the same pattern, odds increase that the pattern will fail.
  2. A new consolidation pattern, perhaps a rising ascending triangle, is forming. The range of this pattern is currently 600 Dow points. Watch for a break of this larger consolidation pattern.

The most recent downswing should not have been a surprise, because (as I have highlighted previously):

  • the triangle price break was not confirmed by volume,
  • the market formed a doji (potential reversal candle pattern)
  • The 12,800 level served as critical resistance
  • The weekly chart also shows significant resistance at this level

Let’s peek at the weekly chart:

Notice how the Wednesday price high found significant resistance at the dual resistance zone from the 20 and 50 period moving averages. The bulls could not push price beyond this key zone.

Also, notice the non-confirmation from volume. Volume was declining each successive week as the market reached an equilibrium consolidation zone.

Let’s briefly see the monthly chart:

The last four months have seen price declines, with some of them being rather significant. February closed almost 400 Dow points lower (3% decline).

In October, the market formed a major monthly doji (which is a signal of indecision, and can act as a reversal signal after a large rise or fall), which provided a potential clue of the upcoming change of trend.

The market (on the monthly chart) is trapped beneath its falling 20 period average and the rising 50 (which served directly as support in January).

The main theme at the moment is consolidation and indecision. Eventually the market will break in one direction or the other, and it will be wise to heed this break.

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