Copenhagen might be a hot topic of discussion, but the winds of change have failed to ignite the DJ Alternative Energy Index to a new trend. This index is becalmed in a sea of indifference, trading in a flat trading band.
We'll start by defining the activity (or lack of it) from a charting perspective. Then we'll look at two break out patterns of development which show where changes may be afoot.
The trading band has support near 250 and resistance near 430. This prolonged sideways movement has defined the market for many months. However, it is unwise to let this trading band activity blind us to opportunity. The gentle rallies and retreats between support and resistance show a move of around 70%. A simple trading strategy of buying on a rebound from support and selling on a retreat from resistance delivers a healthy return every 8 to 10 weeks.
These are valuable, and profitable short-term trends, but they are not the long-term up trending activity that many people hope will develop after the Copenhagen meeting. There are many potential developments for a trend breakout from this sideways pattern. The two which are of most interest are a 'trading band breakout' and a 'typhoon flag pattern'.
The first, and the simpler of two, is a breakout above the resistance level near 430. In this situation, the first upside target is calculated by measuring the width of the trading band. This is projected upwards and has a target near 600. This type of trading band breakout has been a feature of many regional Asia indexes during 2009. The trading band projection can be doubled. This sets a new target near 770.
Aggressive traders will look for a rebound from support and trade this all the way to a trading band breakout target near 600. This delivers round 140% profit.
The 'typhoon flag pattern', however, is created after a sharp rally that creates a flag pole. This is marked by two-to-three weeks of fast price activity moving in a single direction. A favorable outcome at Copenhagen has the potential to set the conditions for this type of fast rally. (Please refer below for more on the origins of 'typhoon flag' pattern)
This pattern is an upwards sloping flag that forms at the top of the flagpole. The sides of the flag are defined with parallel trend lines. It starts initially as a bearish flag pattern. It turns into typhoon flag when the lower edge of the flag value is higher than the peak of the flagpole. This is the entry signal and the value of the peak of the flagpole is used as a stop loss.
A typhoon flag breakout pattern has the potential to test the 900 level in the DJ Alternative Energy index.
Under the current market conditions, the DJ Alternative Energy Index seems plain-sailing for now. But traders can wish for the old Chinese sailors blessing “yi fan feng shun,” which means smooth sailing in mandarin. Not a bad outcome at all, considering that a 70% return on this trading band is still a worthwhile target.
Origins of 'typhoon flag' in charts: In Hong Kong, the strength of the wind is measured on a flag scale. When the typhoon flag is hoisted its time to prepare for a hurricane. In a typhoon, the strong wind actually forces the flag to slope upwards. We call this particular chart pattern a typhoon flag because it shows a strong up trend continuation. Typhoon flags have become a feature of recent market activity. They provide reliable indications of strong trend continuation that does not have any upside target calculation.
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