US Stocks Ripe for Bargain Hunters: Charts
Greece drags at every market. We described the Dow several weeks ago as a gecko hanging on a roof, defying gravity. It has hit a slippery spot, and lost its footing. If this creates a major reversal in markets then we are headed for a repeat of 2008. If this is a minor top within an up trend retracement then there is no need to panic.
The Dow has developed a minor top up trend reversal pattern. This pattern developed as part of a long term up trend line that has been acting as a resistance level. This trend line is a projection of the neck line from the head and shoulder pattern that developed between January 2011 and August 2011. In recent months the Dow has used this up trend line as a resistance level.
A major top of up trend or end of up trend pattern is when the chart pattern measurement target is far below the current index levels. In 2007 the head and shoulder pattern downside target was 3000 points lower than the high of 14,000. This indicated a significant market fall.
The current Dow pattern of behavior developed a small rounding top pattern over the past 10 weeks. The pattern development time is short, and the height of the pattern is small. These are the features that suggest a minor market retreat rather than a full scale market collapse that repeats the falls in 2008.
The base of the rounding top is near 12750. The peak of the pattern is near 13400. The downside projection has target near 12000. This level has acted as a support level in the past so there is a high probability it will act as a support level again.
A rebound from 12000 is a bullish outcome because it suggests the underlying upward trend can continue with a renewed and successful push above 13000. Failure of support in the 12000 area has an initial support level near 11500.
A rebound developing from this lower support level confirms the long term upward trend but suggests the upward trend is not strong. In this situation the 13000 level would provide a much strong resistance barrier.
A fall below 11500 has the next support level near 10500. A fall below 11500 is confirmation that this is a major change in the direction of the trend. Currently there is no evidence in the chart pattern behavior that suggests this is a high probability outcome.
Similar patterns of behavior are seen on the broader S&P 500 index. The rounding top is not as well formed. The left side of the pattern is steeper than the Dow pattern. The same pattern calculation methods are used and give a downside target near 1210 for the S&P index. This is close to historical support resistance level.
The Nasdaq has a steep upward and downtrend pattern and does not fit comfortably into the rounding top behavior pattern. The Nasdaq developed a breakout from a symmetrical triangle pattern. The upside target was near 3140 and this target was achieved. The pull back from this target has a support target near 2700. The market has strong lower historical support near 2600 so the Nasdaq retreat has a higher probability of pausing at the 2600 level.
These support levels provide reference points where there is a higher probability the market will pause, consolidate, and potentially develop a change in trend behavior. These levels provide points where investors are ready to take action. This is potential bargain hunting territory.
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. We welcome all questions, comments and requests.
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