Charts: Fear not, the Dow's uptrend remains strong

A screen displays news on the Dow Jones Industrial Average on the floor of the New York Stock Exchange, Oct. 15, 2014.
Brendan McDermid | Reuters
A screen displays news on the Dow Jones Industrial Average on the floor of the New York Stock Exchange, Oct. 15, 2014.

A period of consolidation has investors worried that the Dow Jones Industrial Average's long-term uptrend has finally run its course, but charts suggest the uptrend remains strong.

Following last year's 7.5 percent increase the Dow index is up just over one percent year to date. The index has consolidated near 18,225 since early March amid concerns that a stronger U.S. dollar could negatively impact earnings at U.S. multinational firms.

But the weekly chart shows the Dow remains within a well-defined trading channel and exhibits a consolidation pattern consistent with a continuation of the uptrend.

The strategic trend and significant feature of the Dow is the up-sloping trading channel defined by four trend lines.

Trend line A forms the middle core of the pattern. This trend line starts in February 2011, acted as resistance in July 2011 and again in April and September 2012. The lower edge of the trading band is shown with trend line B, which was confirmed in June and November 2012.

The width of the trading band from trend line B to trend line A is used to calculate the location of trend line C and upper trend line D.

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Trend line C, which was tested in January 2015, provides support for the index in the current trend. The rebound from this level shows this upper trend line is a very significant feature of the uptrend.

Trend line D defines the upper limits of the trading channel. The Dow's retreat to trend line C as a support level was not surprising. There is a high probability the index will continue to move in the upper trading channel using trend line D as resistance, which confirms a continued bullish outlook for the Dow.

This series of trend lines sets the analysis framework for the up-trend continuation.

The index has a short-term rebound target of 18,700, calculated using the value of trend line D, with good support near 17,300.

The longer-term Dow upside targets are defined by the resistance level created by trend line D and have a projected value of 17,800 and 19,100 in December 2015. This includes the upper and lower sections of the value of trend line C and D.

In the future the market could fall below trend line C. Currently the Dow could fall to 16,376 and remain in the long-term uptrend. A retreat to 16,376 would mark a 10 percent fall from the high near 18,196 indicating a trend correction. A fall of more than 10 percent would indicate a change in the direction of the trend.