Midweek Dow Index Overview

Nov 19, 2008: 11:20 AM CST

As we near the halfway point in Wednesday’s trading, let’s look at the current Dow Jones Index structure on the daily chart to assess the current technical picture.

Dow Jones Daily:

The 8,100 level has held key support five times since October with only two instances of price ‘nipping’ beneath that level.  Mid-October brought us the 2008 price low of 7,750 which has currently held, and the lowest closing low has been in late October as well just beneath 8,200.  These would no doubt be key levels to watch.  Were they to break on a closing basis, there would be no logical support zones near where price is currently.

Price appears to be forming a descending triangle as evident from the steadily declining upper trendline since early November.  The height of the triangle is roughly 1,250 points, so a break above 8,500 or beneath 8,100 would set-up respective simple price projection targets as price breaks forth from this current consolidation pattern – that’s not to say we get there immediately however.

The structure of the daily moving averages is in the ‘most bearish orientation possible,’ and notice that the 200 day SMA is steadily declining – that’s not a good sign for buyers.

One good sign is that the momentum oscillator is ‘diverging’ with price and is showing positive momentum as price languishes at the current levels.  Note that the last two days (and today’s action so far) have been low-range days which is an interesting contrast to the large, triple-point swings in the Dow we’ve now been accustomed to experiencing.  It’s odd when you can call a 100 point Dow day “low-range” relative to the recent past but that’s what it has become.

What’s the take?  Odds of holding short might be slightly higher risk than holding long, but during a consolidation pattern, it’s best to wait until a clean break up or down occurs rather than trying to predict the direction of the break.  Join in once price breaks its currently narrowing boundaries for a potential expansion move.  If you do decide to bet directionally prior to the break, pay close attention to your stop-loss placement just beyond the range – if you’re correct, you’ll likely achieve a low-risk (tight stop) and high-reward (upwards of perhaps 1,000 points or more) move.

Still, the number 1 goal in this environment should be capital preservation.

3 Comments

3 Responses to “Midweek Dow Index Overview”

  1. J Says:

    Thank you very much, Corey. A quick question since you mentioned “Odds of holding short might be slightly higher risk than holding long”: how short is your “holding short” and how long is your “holding long”? Thanks.

    J

  2. Corey Rosenbloom Says:

    J,

    A good question. As per my recent post on the possible Elliott Wave count, and because of the possibility of the 8,000 level holding (though we’re right at that level with today’s close), I would say short-term would be until the end of the year and into perhaps February of 2009 and long-term would be beyond May of 2009.

    In regards to ‘holding short,’ that is in reference to holding puts, inverse ETFs, or outright short futures, ETF, or stock positions. Your respective position size should be based on your risk-management parameters.

    Unless we break the 8,000 level cleanly, I see more ‘risk’ of a bounce happening which would be in order of a short-covering rally, so the “risk” is lower by getting long here.

    It’s not about directionality, it’s about risk. IF 8,000 holds, you need to place a stop around 7,700 or above if you get long and can ‘play’ for 9,000 or perhaps 10,000. That’s quite a large reward to risk ratio.

    However, if you get short right here, you’d need to place your stop above 8,500 or perhaps beyond. If price falls, it would be a better place to get short THEN as opposed to right now. I hope that answers the question. Looking at it from a risk/reward standpoint rather than a directional “the market will go up or down” standpoint.

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