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Dow Rally Likely to Hit Barrier at 13,500: Chartist

Monday, 6 Aug 2012 | 10:03 PM ET

There are two key charting features on the weekly chart of the Dow Jones Industrial Average index. These features suggest that the DOW faces significant resistance barriers which place limits on the upside in this market.

This does not mean the DOW is heading for a trend change. These resistance features place a limit on the speed of the uptrend and the ability of the uptrend to move easily above 13,500. This suggests that the impact of any new round of quantitative easing may be limited.

The dominant feature of the DOW index chart is trend line A. This trend line is a projection of the neckline from the head and shoulder trend reversal pattern that developed between 2011 February and 2011 July.

This neck trend line is projected forward into the future and it has provided a strong resistance feature. During 2012 March the DOW reached this trend line resistance level and then retreated. This suggests trend line A will continue to play an important resistance role in the future.

In recent weeks the DOW has developed a small up sloping trend channel. This is defined by trend line B and C. This channel runs parallel to trend line A. The current DOW index activity is trapped within the trading band and this gives rally and retreat behavior within the environment of a longer term up trend movement.

Trend line B is clearly defined and easy to place along multiple high points on the weekly chart. In placing trend line C we have tried to capture the bulk of the trading activity low points. Trend line C is also parallel to trend line B. Many investors are buying when the DOW retreats and tests the support level provided by trend line C.

In the short term this trading channel pattern places a limit on the ability of the DOW to move quickly upwards. The up trend is constrained by the resistance indicated by trend line B.

In the longer term any breakout above trend line B is limited by the very strong resistance features of trend line A. The DOW is best suited to a volatility based approach.

The trend pattern in the DOW is different to the trend pattern in the broader S&P 500 index . The S&P trend is well defined with the Guppy Multiple Moving Average. The long term group of averages have wide separation and shows investors are buying.

The DOW up trend has resistance created by trend line A and B. The S&P uses the GMMA as a support level in a rising trend. The DOW is bullish, but not as strongly bullish as the S&P.

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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