Trading is not a game of exacts. Perfectionists need not apply. Markets are made up of many irration...
Stalking Major Moves: Looking for Signs of Where the Market Is Headed (Part 3)
10/15/2008 12:01 am EST
Let's look at the chart that was drawn just before this past June's Traders Expo, held in Los Angeles, and see what clues it offered about the direction of the Dow and what I said in my interview with MoneyShow.com:
Between February and mid-May, the Dow did exactly what the prior chart had predicted: It traded gently higher, consolidating in a 1200 point range as it made higher highs and higher lows. The combination of the Dow gently rallying and bars moving to the right each day brought the price of the Dow above the red down sloping Upper median line parallel. Once price closed outside the upper parallel, I added a red down sloping first warning line to the right of the upper parallel, because with roughly 80 percent probability, my statistics show that price will make it to that next line. Note that it worked like a charm! But once price tested the first warning line in mid-May, a change in behavior occurred: The Dow basically left double tops just above 13,100 and then turned lower and began making lower highs and lower lows.
More important, in early June, the Dow broke and closed below the blue gently up sloping Lower Median Line that had marked the beginning of the consolidation rally. As I spoke to Tim Bourquin during the MoneyShow.com interview, I re-iterated that I was extremely concerned that the Dow was in serious trouble and the recent sell off was likely to accelerate. The red down sloping median line set was clearly in control and this new change in behavior to lower highs and lower lows, coupled with the close below the up sloping lower median line led me draw in new targets on my hand charts. I now felt we might easily see a move 1000 or more points lower than the prior 7300 major low in the Dow yet this year.
Let's look at the chart that was drawn just before this past September's Forex Trading Expo, held in Las Vegas, and see what clues it offered about the direction of the Dow and what I said in my interview with MoneyShow.com:
This is a closer look at the same chart so you can see more of the future potential moves that the Dow may face. The Dow sold off to the 10,850 area, breaking back below the down sloping red upper median line parallel before beginning a climb higher—another change in behavior. The Dow basically rallied about 800 points but when it approached the down sloping red first warning line, it ran out of up side directional energy and began a sell off with lower highs and lower lows—another change in behavior.
More tomorrow in Part 4.
Related Articles on STRATEGIES
Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...