Current Dow Structure and Possible Resistance

Nov 5, 2008: 9:54 AM CST

Now that the United States has a new President Elect – Barack Obama – let’s take a current look at the Dow Jones average and take note of the current counter-trend retracement rally up into potential resistance areas ahead… and view an interesting triangle pattern that occurred early last night in the futures market.

First, the Dow Jones Daily Chart:

The Dow is completing an impressive counter-rally to the upside, taking price from a closing low near 8,250 to yesterday’s high near 9,750 for a remarkable 1,500 or 18% rally!  That is welcome news to long-term investors.

However, let’s continue to look from a trader’s perspective, and ask the question, “Where might this rally hit resistance… or will it?”

Using the current structure, we see a confluence of resistance about the 9,800 – 9,900 level, which is a confluence zone of the 50% Fibonacci retracement with the falling (stabilizing) 50 day EMA.  Price is now above the 20 day EMA which provided minimal resistance.  Look closely to see price formed a doji (indecision – small range) candle at the 38.2% Fibonacci retracement level, as this brought in minimal selling, but buyers were able to overcome that zone with confidence on Election day.

Update:  Currently (as of this writing), the Dow is down roughly 200 points at the open, trading at 9,425.

One note of caution is that volume is trending lower as price is trending higher, setting up a significant non-confirmation of higher prices (which is to be expected on counter-swing rallies).  Keep a watch on this closely.

A positive momentum divergence preceded this rally, which could be construed as a possible Elliott fractal wave 4 counter-advance.  Let’s continue to watch these developments closely as they develop.

From an educational standpoint, I wanted to highlight a rising triangle formation that set-up on the Dow-Mini futures (@YM) around 2:00am that led to a quick and sudden – expected range expansion – sell-off.  It’s an example in pattern recognition.

Price often breaks out of triangles 66% to 75% of the way to the Apex – the point at which the triangle trendlines converge.  This case is no exception, and the rising and horizontal trendlines were exceptionally clear.  The target – the height of the triangle – was met quickly with a large expansion move out of consolidation.

Guard your capital until the volatility settles down, unless you’re a trader who thrives on volatility.

9 Comments

9 Responses to “Current Dow Structure and Possible Resistance”

  1. Tom Says:

    Volume on a rally is always important to me Corey. I thought we might have a bottom but I do not think the volume on the rally measures up. Maybe just bear market rally. See http://www.safehaven.com/article-11747.htm.

    Your comments on the volume of the Rally would be welcome.

  2. Corey Rosenbloom Says:

    Tom,

    You’re 100% right. I was hinting about that in the post – that we’re not seeing higher volume on the recent up-swing, thus volume is serving as a ‘non-confirmation,’ meaning odds of further upward prices are limited by this development.

    I still hold that we’re in fractal wave 4 up and then we test the lows or perhaps exceed them at some point, perhaps into 2009. I’m still thinking odds are good for some sort of rally after the election, or at least the holiday or ‘end of year’ rally which usually occurs, but we’ll take it day by day.

  3. Tom Says:

    Appreciate the good work and comment. Wish I had shorted what I was looking to short on close yesterday. If frogs had wings they wouldn’t bump their ass. Did get short something this morning. We’ll see.

  4. Gary Says:

    I see this volume dabate quite often but in actual application volume does not determine whether a rally will succeed or not. Volume declined as the market moved out of almost every correction during the bull market. It declined as the market bounced out of the summer 07 lows and it’s declined as every bear market rally has gotten started.

    There really is no historical data to suggest that volume must expand for a rally (bear market or otherwise) to take hold.

  5. Dominick Says:

    Corey, did this pattern give any hint as to which way it would eventually break? Up or down.

  6. Tom Says:

    To Gary. I have been trading since 1980 and believe me volume gives you all kind of clues. Expanding volume is always bullish. If they say the market is down but only on declining volume, run for the hills. It is often a real bullish indicator on declines as well as rallies but most often at turning points. It does not have to confirm a rally as you say but on individual situations like the 1998 LTC episode the 1987 crash the 1982 beginning of the bull market and innumerable turning points in individual stocks and in the market in general it sends a message, if you know how what it is saying in the context of the situation you are in.

  7. Corey Rosenbloom Says:

    I interpret volume as a separate indicator – another piece of the overall puzzle. No single indicator… not volume, not oscillators, not moving averages, not Fibonacci, not the ADX, etc can give you a clear picture of the probabilities. To properly assess the probabilities – and that’s all you can do – you need to examine the data we’re given, see points of confluence, and look for confirmations or non-confirmations among indicators. When there’s various non-confirmations, stay out. When your analysis yields various confluences be it in price or indicators, that can yield powerful trading signals.

    A counter-trend rally into confluence resistance in the context of an overall down-trend on declining volume sends an unmistakably bearish signal, as we’ve seen now that the Dow has lost 800 points from when this chart was screen captured. If volume was trending higher, it would have “confirmed” the higher prices. As we have it, volume served as a “Non-confirmation” of higher prices which added one more bearish piece to the puzzle, or added a little better odds that price would go down than up.

    Taken together, we try to assess the larger picture and see what all the different components are saying as best we can.

  8. Corey Rosenbloom Says:

    Dominick,

    Traditionally, ascending triangles are bullish, so I wanted to show this one as an example that we can’t just fall back on expectations in terms of pattern recognition.

    For me, I throw away the whole “bullish/bearish” debate and simply see triangles for what they are in terms of price structure: Consolidation Patterns. Upon a price break-out of the trendlines, we can expect a continuation or trend move in the direction of a confirmed break in terms of the price expansion/contraction principle.

  9. Dominick Says:

    Thanks Corey. Helpfull as always, keep up the good work.