Weekly Index Overview – Resistance Ahead

Nov 30, 2007: 10:58 PM CST

This week saw a precarious shift in the direction of the major US Indexes due to comments by Federal Reserve Officials who still have power to affect price swings in markets. The bulls scored a major victory but still have work to do to overcome the daily downtrend on most Indexes. Let’s look:

The Daily Chart of the Dow Jones Index shows a temporary downtrend, with lower highs and lower lows. The current structure has been broken with a higher swing high, but that high has taken us into key resistance, and a ‘down-swing’ is probably in order which would take us back to (at least) 13,000 to retest that level to see if price can make a higher low. Resistance is also coming in via t he declining 50 period daily moving average.

A recent price divergence with the momentum oscillator hinted that an ‘upswing’ was to come in price, which is exactly what happened. Divergences – especially those that occur at the bottom of the Bollinger Bands or Keltner Channels, often serve as high-probability events to return to the 20 period moving average, which is exactly what occurred here.

To be re-confirmed as an uptrend, price needs to swing down to make a higher low and then swing back up and take out the most recent higher high at 13,400. Until then, price is still in a ‘technical’ daily downtrend.

The weekly view shows an interesting picture:

Let’s look at this individually:

  • There is a key momentum divergence forming, as price made a higher high, momentum made a lower high
  • Volume is higher through the consolidation period… is this active distribution taking place?
  • The momentum oscillator registered a key New Momentum Low not seen in over two years. Significant?
  • Price carved a new price low following a new price high. Confusion?
  • A Broadening Formation is clearly developing. Bearish implications?
  • Price is currently trapped between the weekly 50 period (one year) moving average and the 20 period (four month) moving average.

Summary:

We see resistance on the daily chart from the prior ‘horizontal line’ support/resistance, and from the flat/declining 50 period moving average.

We see resistance on the weekly chart from a declining 20 period moving average.

Price on the daily chart has experienced an upswing and – in my assessment – odds favor a brief downswing in price to retest prior levels to see if a higher low can be established.

Remember, it’s often best to ‘play’ the market one day at a time and one swing at a time and not get too far ahead of yourself. If price breaks above these levels – which it can do – then it will do so against the odds as generated from a basic level technical analysis approach.

Study your own charts and identify potential conclusions from your own experience.

1 Comment

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