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'Megaphone pattern' says Dow will climb higher

The market is shouting something. Can you hear it?

Traders on the floor of the New York Stock Exchange.
Lucas Jackson | Reuters
Traders on the floor of the New York Stock Exchange.

The Dow Jones industrial average's move to a record high is a bullish breakout of a pattern that's kept it contained for the last 16 years. And that breakout is the Dow trying to tell us that further gains are ahead, according to technical analysts.

Looking at a monthly bar chart of the Dow, a picture of a megaphone appears by first drawing a line from the 1999 high through the 2007 high to the record level this summer and then drawing another line from the low reached in 1998 down through the 2009 credit crisis low.

The Dow's megaphone pattern

Source: KimbleChartingSolutions.com

To maintain the megaphone pattern, the market would need to sell off at some point to a level below the 2009 credit crisis low. But the huge turnaround in the market last month broke through the top of this megaphone pattern. Further gains this month confirm the Dow is shouting "goodbye" to that pattern, chartists say, and no such decline to the lows is in the cards.

"We would expect more gains to come now, as the top of that megaphone pattern (represented) very heavy resistance," said Chris Kimble of Kimblechartingsolutions.com.

Kimble, a chart analyst for 30 years, likes to take a step back and look at the monthly charts from time to time in order get a 30,000-feet perspective, something lost on many investors obsessed with the minute-by-minute tics today. The megaphone pattern is one he checks on occasionally.

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"A monthly chart is more important than a weekly and a weekly chart is more important than a daily one," said Kimble.

In order to see the world as Kimble and other technical analysts see it, it's worthwhile to have a quick explanation of the bar chart.

A bar chart is drawn by marking a security's opening value from a designated time period, then drawing a vertical bar formed by the high and low points of the period, and then marking the security's close of the period.

The Dow's big bullish reversals

Source: KimbleChartingSolutions.com

The Dow's bar chart did something quite remarkable last month, according to Kimble. The large trading range of October and the close at the high of that range formed the biggest bullish bar since the bounce off the credit crisis low in March 2009.

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So in a technical analyst's eyes, the panic selling last month on fears of higher interest rates and an Ebola outbreak, followed by the enthusiastic buying on optimism those fears were overblown, was a pattern very similar to the end of the credit crisis.

So the bulls now have something to shout about.