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Dow Upside Limited, but S&P Could Soar 18%: Charts

The recovery pattern in the Dow has diverged from the recovery pattern in the broader S&P 500 index. The divergence in patterns is important because it changes the way these recoveries are traded.

The Dow is best suited to a volatility based approach while the S&P is more suited to a trend trading and rebound approach. Select the wrong trading method and the results are unsatisfactory. Mismatch and your stops are blown away, or profits are limited.

The Dow is dominated by two head and shoulder patterns. The first head and shoulder pattern was a trend reversal pattern. The downside targets were achieved. Then the Dow developed an inverted head and shoulder pattern.

When this appears after an uptrend and before a clearly defined downtrend bottom then the inverted head and shoulder pattern is treated as a trend consolidation pattern.

The rise in the Dow is limited by the extended uptrend line A with a current value near 13,400. There is a higher probability any rise will react away from this resistance level.

The trend behavior in the S&P is very different behavior. Overhead resistance is not created by any extended trend line. Historical resistance is near 1,550. The market clustered near 1,430 and this was the lower level of an historical support consolidation band.

The S&P trend is well defined with the Guppy Multiple Moving Average indicator. The long term group of averages - shown in red – provides an idea of investor sentiment.

The wide separation shows investors are buying. This group of averages has arrested the fall in the S&P and acts as a rebound point. This rebound from trend support suggests a stronger and more stable continuation of the uptrend.

The Dow is moving towards a trend line resistance. Then S&P is using the trend as a support level and developing a sustainable rebound. It’s an important difference and your trading tactics should be adjusted to suit these different market conditions.

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

Asia Economy