Skip navigation

Charting Asia

RSS FEED

» Help

Current DateTime: 03:09:44 30 Nov 2009
LinksList Documentid: 31801486
Expiration DateTime: 11/30/2009 3:12:46 AM
powered by digg
Dow 10,000? Charts Say Yes
Published: Tuesday, 28 Jul 2009 | 4:35 AM ET
Text Size
By: Daryl Guppy
CNBC Contributor

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


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.

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.

© 2009 CNBC, Inc. All Rights Reserved
Companies:Companies
Add This share icon
Text Size
  • digg share

CNBC HIGHLIGHTS

  • These four sectors will be the next to lead the market.
  • Zhu Zhu Pets are this year's must-have toy, fetching $40 or more on eBay.
  • T shirt man
  • From the why-didn’t-I-think-of-that file, we present Jason Sadler, a man whose job is wearing T-shirts.
  • It may be the most unusual guide to business you'll read.
  • Shopping for a gadget hound? The choices can be baffling. Here are a few that should be a hit.
  • "The Who" will be the halftime act for Super Bowl XLIV on Feb. 7 in Miami. Is the NFL behind the times?
ADD COMMENTS
Remaining characters


Current DateTime: 01:41:57 30 Nov 2009
LinksList Documentid: 29778428

Current DateTime: 01:01:49 30 Nov 2009
LinksList Documentid: 29779196

Current DateTime: 01:08:05 30 Nov 2009
LinksList Documentid: 29779199

Current DateTime: 01:08:05 30 Nov 2009
LinksList Documentid: 29779198
  Data is a real-time snapshot  *Data is delayed at least 15 minutes
Global Business and Financial News, Stock Quotes, and Market Data and Analysis

© 2009 CNBC, Inc.  All Rights Reserved.
A Division of NBC Universal
Thomson ReutersThomson Reuters