Charting Asia

Published: Tuesday, 28 Jul 2009 | 4:35 AM ET

Text Size

Now that the 9,000 mark has been passed in the Dow Jones Industrial Average, everyone wants to start counting to 10,000. Do the bulls have enough momentum to charge ahead? From a charting perspective, this is possible but several small cautions come with this optimism.

The first is the small resistance area near 9,400 that is seen on the weekly chart. The initial rebound from below 8,000 found resistance in this area so there is a high probability resistance will develop again.

The second caution is the 10,000 target. It is a nice round figure but the chart shows the strongest historical support is near 10,200. This is the area that will provide the strongest resistance and cap any rise from 9,000.

Who cares about caution now the depths of the economic winter are behind us? Green shoots apparently have not withered. On the very positive side is the unchecked market fall from 11,000 to under 8,000 in just a few weeks in 2008.

This is a positive because the fall did not develop any support areas. This suggests that a breakout above 9,000 has essentially no technical or charting barriers to a rapid move towards 10,000. This is the equivalent of clear skies ahead.

More From CNBC.com

• Pros Say: S&P Could Rally Another 10-15%
• Charts: Nikkei to More than Double in 3 Years
• Back to Asia Pacific Stories

The rapid rebound that carried the index above 9,000 has confirmed the development of a powerful bottom reversal pattern. This is not the V-shaped recovery suggested by some analysts who do not have good chart analysis skills.

For a true example of this pattern they need look no further than the Shanghai Composite Index. The pattern of Dow recovery is very different. The Dow shows an inverted head and shoulder pattern, and it's most clearly seen on the weekly chart.

CLICK HERE TO SEE FULL CHART

The inverted left shoulder is created in December 2008. The inverted head is created by the March 2009 lows. The inverted right shoulder has just been confirmed with a low in July. A neckline is plotted between the base of the left and the right shoulder. The inverted head and shoulder pattern is confirmed when the index moves above the neckline near 8,700.

The depth of the pattern between the head and the neckline is measured and projected upwards to provide a target. The target level is 11,600, well above the initial 10,200 resistance level. This is a long term target. While it provides for a level of optimism, it does not give much indication of how long it will take to achieve the target.

Those who feel this is a fanciful use of chart pattern analysis can turn their attention to the end of up trend head and shoulder pattern we identified in Charting Asia notes in late 2007 when the Dow was trading at 13,600.

• More Charting Asia

Our pattern downside targets of 11,200 were achieved within 6 months. These are long term patterns. Their application is in the broad trend reversal messages they send. Other tools are used to time entry and exit conditions.

CLICK HERE FOR FULL CHART

Anyone who has been savaged by an inadequate assessment of risk in 2008 knows risk cannot be ignored. The most significant risk in a market recovery beyond 9,000 is the nature of the trend.

It is not enough to say the trend is moving up.

Gamblers use this as sufficient excuse to take a position and hold onto it secure in their hope that the general trend is rising. Traders and good investors are more cautious. This rising trend will see significant retreats. Some stocks will not survive the economic winter of 2008. This is the equivalent of climate change. And although some stocks may appear to recover in the early stages of the general market rise there is a danger that they do not have the resources to fully compete in the new environment. Individual stock risk remains high so good trade management is required.Good trade management is enhanced with trend clarity and this is the key factor that is missing from the Dow. Trend behaviour cannot be easily defined with a trend line, with a combination of moving averages, or with other methods that are normally used to define the trend. When a trend is defined it provides a mechanism to distinguish between unimportant price action – not a threat to the trend – and significant price action – a threat to the trend which signals an exit from the trade.

Before we count to 10,000 we have to have to count one by one from 9,000. The target is achievable but the nature of the trend behaviour is unclear and this will make trade management more difficult.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at . We welcome all questions, comments and requests.

CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.

Print

Email

Text Size