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Dow's Next Upside Target 13,000-13,500: Charts

U.S. markets are looking to end off the year on a positive note, hitting new closing-highs on Wednesday, as investors remain optimistic about the prospects for equities in 2011. But how much further can this uptrend continue for?

When a market has been moribund for so long, any movement, no matter how small, takes on additional significance. The Dow's rise above 11,600 is a move towards the upper part of a sideways trading range that dominated the markets in 2010.

It is driven by changes in money supply conditions created by the latest round of quantitative easing and some suggest this does not reflect any fundamental change in economic conditions.

The move from the trading band low at 9,600 to 11,600 looks an impressive 20 percent but it hides a generally weaker performance of the market when measured against Asian markets.

Year-on-year the Dow's rise is around 10 percent from 10,500 to 11,600. This raises some questions about the strength of the move beyond 11,600. The move to 11,600 is interesting from a technical perspective. It has been a long time coming, but 11,600 is the projection target for the inverted head and shoulder pattern that developed between November 2008 and July 2009. It has taken almost two years for this long term chart pattern to play out.

A number of European markets in particular developed similar inverted head and shoulder patterns around the same time in 2008 to 2009. However these markets have reached their projection targets much earlier and have since developed new patterns of breakout behavior. These markets, including the DAX and the FTSE provide some indication of how the Dow may develop as it tests the inverted head and shoulder target level at 11,600.

Additionally, the breakout from a broad sideways consolidation band is not unique to the Dow. This same pattern of behavior is seen in many European and Asian markets, and in a number of commodity markets, including oil. The width of the trading consolidation band is used to project the next upside target. With the Dow, this is between 13,000 and 13,500. The variation is due to the imprecise support level created at the lower edge of the Dow's consolidation area.

Either of these targets suggests a reasonable level of return for the Dow, but they ignore one important feature associated with the achievement of the inverted head and shoulder pattern targets. The continuation of the uptrend after the target has been achieved is not guaranteed. The market may move sideways, using the 11,600 level as a support level and moving slowly towards the new trading band projection targets. The breakout above 11,600 does not necessarily make for strong trending behavior.

This remains a stock pickers market rather than an investors market. In 2010 the market added, at best, 20 percent. Over the same period Baidu added around 130 percent. Finding stocks that display consistent strength is the challenge for 2011. Their strength may be aided by a tepid Dow breakout above 11,600. Traders will look for rally and retreat behavior in the index as the 11,600 level is tested as support and as the market probes towards trading band targets near 13,000 or 13,500.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. He is now also on Facebook.

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.

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  • Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.

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