Triangle Action in the DIA

Dec 26, 2008: 3:25 PM CST

There’s much discussion occurring regarding the triangle formation occurring in the major US Equity Indexes.  Let’s focus for a moment on the DIA (Dow Jones ETF) and see this triangle in action.

DIA Daily chart:

The structure is still the same – price is in a confirmed downtrend with price making lower lows and lower highs, and the orientation of the key daily moving averages is in the most bearish position possible (20 beneath the 50 which is beneath the 200).

There are two interesting divergences playing out and perhaps resolving:  First is the positive momentum divergence that set-in on the November price lows which preceded the current ‘rally,’ while the second divergence is the non-confirmation from volume into the recent rally – albeit we are experiencing “holiday volume” which throws off volume analytics for the time being.

The 50 day EMA continues to supply price resistance, while price meanders through its flat 20 day EMA.  Moving averages have less significance generally when they are ‘flat,’ or the market is in a consolidation phase (as is evidenced by the current price contraction which resembles a triangle formation).

It would be significant if price could break above the $90 level or beneath support at the $80 level.

Let’s pull the perspective back and add in a key possible Elliott Wave count.

DIA Weekly Chart (with selected Elliott Waves):

I’ve simplified this chart because I want you to focus closely on the triangle pattern that has formed on the chart – it’s much more evident in the weekly chart than the daily.

Whatever you want to call this move, it is clear that it is a consolidation pattern that can also be known as a “corrective” or ‘counter-trend’ structure.

Going back to the price structure, price remains in a persistent downtrend which is confirmed by the structure of the key weekly moving averages (again, now in the ‘most bearish orientation’ possible).

This Elliott Wave count assumes that we are still in the larger scale Wave 3 down which has been horrendously destructive to investors, and that fractal Wave 5 is perhaps yet to come… and soon.

Should price manage to break to the upside, it would find key resistance via the falling 20 week EMA around $95 per share (Dow 9,500)… but the odds seem to favor a potential downside break which would take price to new lows into 2009 perhaps to the $70 to $73 level (Dow 7,000 to 7,300).

We’re at a critical cross-roads, and just a push in either direction could send funds scrambling… to buy or to sell together.  Watch the market very closely, and be prepared for a trend move (impulse… or breakout of consolidation) at any time now.

Corey Rosenbloom
Afraid to Trade.com

15 Comments

15 Responses to “Triangle Action in the DIA”

  1. toad37 Says:

    I find it intriguing that we could still be in wave 3 down. It is quite chilling to imagine how low 5 would take us in this case. I took a small position in osu, looking for a small bounce here from the low volume sell off that occurred before Christmas. Have a good weekend everyone.

  2. Corey Rosenbloom Says:

    Toad,

    I kept trying to analyze it away as well, not wanting to envision the ultimate price low. S&P index 400 is not out of the question when it’s all said and done, which is a two-point Fibonacci projection target, Elliott target, and near where one reader put us in terms of earnings valuations (in a comment).

    I sincerely hope we don’t go there, but we’re all doing our best to apply Elliott as best we know how – and it seems we’re still in the big 3 of primary C. Terrible for investors.

  3. toad37 Says:

    Terrible indeed… Oh well, like you say, let’s just focus on what’s I’m front of us.

  4. Reggie Perrin Says:

    with everyone watching the same triangle a ‘false break’ is quite likely

  5. Andrew Stanton Says:

    That’s no triangle; at least not the way it’s drawn with the B/D wave sticking out like a sore thumb.

  6. Corey Rosenbloom Says:

    Reggie,

    That’s kind of more the line I’m preparing for, though it will be very difficult to believe it should the break be to the upside. It’s certainly getting a lot of attention, and for whatever reason in the marketplace, if everyone expects the same thing, the opposite is bound to occur.

  7. Corey Rosenbloom Says:

    Andrew,

    If it’s an Elliott triangle, it looks different than most of the textbook definitions, at least on the daily chart. I’ve seen different interpretations but they all seem to depart from the ‘basics.’

    It’s more evident on the weekly chart, that a triangle consolidation is forming but probably not in the nature of classic Elliott triangles – more like the classic TA pattern of a symmetrical triangle.

    Either way, on the weekly DIA, we seem to be nearing the apex, or expected break-out point very soon.

  8. Andrew Stanton Says:

    If an Elliott triangle is forming, then it is currently tracing out wave C with the October high as A and the November low as B. That is assuming the November low was not an ending diagonal circle wave 3.

  9. Anonymous Says:

    Triangle or not, consolidation it is, for continuation of the downward trend.

  10. samir ghadiali Says:

    Dear Corey,
    First of all Merry Christmas to you.Just check monthly chart of dow jones hovering around 200 month sma and also check 20 and 50 ema are just crossovering each other in december itself i think 2009 is not good for bulls anyway

  11. Corey Rosenbloom Says:

    Andrew,

    If that’s the case then we have a little more time left in this corrective move, though it would be just a little more than halfway over.

    But you’re right as well – one can still make the case that the November lows were indeed the terminus of the large-scale 3rd wave, which actually would be quite good news for the market. As it stands now – if it is a fractal wave 4 of 3 triangle, we’re looking much lower for the end of the 5th wave.

  12. Corey Rosenbloom Says:

    Anon,

    That is the direction my analysis is showing, but the market likes to throw curve balls for whatever reason so we need to be prepared for the possibility that an upward break could occur. Traditionally, triangles are indeed continuation patterns and with the strength of this trend, it looks like down is where we’ll be headed before long.

  13. Corey Rosenbloom Says:

    Samir,

    The monthly averages, as easy analysis as that is, are powerful indicators that many investors and fund managers take very seriously. It’s sort of like a spiral – selling occurs to push price lower, dropping the averages, and when bearish patterns form on the averages, more selling results because of the averages (and other factors).

    Looks like the ‘positive feedback’ of a selling loop has taken hold on all timeframes now.

  14. Andrew Stanton Says:

    This debate illustrates perfectly the shortcomings of using Elliott wave for normal trading. My experience is that Elliott analysis is an academic exercise about 99% of the time because that is how often there is enough doubt in your wave count to make a reasonable risk reward trade impossible. So you ask, why use it? Because every so often there is a crystal clear count, with such very well defined risk parameters, that offers a fantastic trading opportunity. For me this is usually when a fifth wave at three degrees of trend is found on an hourly, daily, and weekly chart. That is the sort of trade that justifies all the time spent agonizing over ambiguous counts. The next such opportunity will come at the conclusion of this C wave down from the 2007 high although rallies are not as much fun as declines since the latter usually offer the kicker of higher implied volatility for the options which I normally use for that type of trade. Happy New Year to all!

  15. michael g Says:

    You have done an excellent job in your presentation regarding the present wave count. Many people don’t understand the significance of the EWave analysis. The main value is to determine the major and minor trend and to follow along with that trend. At some point in time a powerful move will occur as the market wants to change trend back up. Until such a move develops the trend is down. I simply look for abc upmoves to sell into.