Market Faces Two Lines in the Sand

Apr 8, 2008: 9:06 PM CST

The Dow Jones Index is trapped between two key support and resistance areas, and it will be interesting to see which force breaks first – a break of the upper level will have profound implications for the future.

Notice I have drawn the proverbial “Line in the Sand,” which is an area just beneath 12,800 which has served as both key support and resistance (going back further even than this chart shows).

A clean break of this level would be significant because the area would likely revert to support and the market would be set to retest highs (or at least other congestion zones) near 13,600. Can anyone foresee a 1,000 point run-up in the Dow under these conditions? The charts may be hinting that scenario could be in the cards.

Also, notice we have a technical ‘ascending triangle’ which is struggling to complete itself (two black converging trendlines). Generally, ascending triangles are bullish, but there is no guarantee of any outcome from a consolidation pattern.

There is a slight momentum divergence forming, but that is unsurprising considering that momentum narrows as price forms (and completes) any consolidation pattern.

Notice how many ‘long upper shadows’ have formed as price has failed to rally above the “Line in the Sand” around 12,700.

Also, I wanted to highlight the potential crossing of the 20 period moving average above the 50 period average. Should this cross complete (if price stays above these levels), this would be another significant sign of market strength and support.

As it stands, we would say the odds may favor pullbacks to this area serving as support.

But wait! The market is trapped! There is support just above 12,400 and resistance beneath 12,750. What is the market to do? Can it stay in this 350 point zone forever?!

Of course not! The market is bound to break one of these levels in the near future, and there is potential for a momentum burst in the direction that the market breaks. It’s really difficult to predict the direction of the break, but easy to predict that the odds are high for some sort of continuation move once a clear direction is established out of this recent consolidation zone.

Be ready for anything and try to have fun when it happens!

1 Comment

One Response to “Market Faces Two Lines in the Sand”

  1. ArizonaChartist Says:

    Great post, Corey! Hadn’t noticed the triangles until you brought them to our attention here.

    Not sure how much attention you pay to Dow Theory. Just would like to take this opportunity to point out that a close above 12,743 on the Dow Industrials would mark their first higher high since last July. Given that the Transports have already bested their early Feb high, a higher high on the Industrials would generate a Dow Theory Buy Signal.