The touched a fresh all-time closing high last week, boosted by earnings results and the Federal Reserve's decision to further taper its monthly stimulus program. According to charts, this may be just the beginning.
The index is in a zombie market, but in the best possible way: the uptrend is simply unstoppable. Despite some faltering steps, nothing seems capable of ending its rising trend. While there's currently a pause around resistance near 16,500 this is consistent with the long-term trend behavior.
We start the analysis from the negative perspective by looking for technical indicators which suggest an end to the trend. It's no good pointing to the oscillator-style indicators, all of which show over bought conditions. Simplistic technical analysis suggests that prolonged overbought signals precede a market fall and highlight the potential for a trend change. Unfortunately, in a strongly trending market, oscillator-based indicators will consistently give misleading over-sold signals. Depending on the time period for the oscillator it may take 30 days or more for the strong trend readings to wash out of the calculation and normalize readings from the over bought condition.
The Dow does not show any chart patterns which signal the trend is ending. These patterns include a head-and-shoulder pattern, rounding tops and blow-off tops, or steeples made on high volume. None of these patterns are seen in the Dow and nor is there any evidence they are developing. The only blot on the horizon is the recent resistance near 16,500. This is a feature on the daily chart but is not a confirmed resistance level on the weekly chart.
So let's proceed to the positive perspective. There are two defining trend features on the DOW chart.
The first is the strong trend shown by the Guppy Multiple Moving Average (GMMA). The long-term group of averages is well-separated, which shows strong investor confidence. The width of the GMMA acts as a shock absorber and cushions the impact of any selling. This suggests that the dips in August and October 2013 and February 2014 were safe entry points. The recent dip towards 16,000 was also a good entry point for a continuation of the uptrend. Additionally, the clustering near the value of trend line C is bullish.
The second feature is the up-sloping trading channel defined by three trend lines. The most important of these is trend line A which forms the middle core of the pattern. It is also the most well-defined. This trend line starts in February 2011, acted as a resistance in July 2011, and again in April and September 2012. The Dow broke out above this resistance level in February 2013.
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Starting in February 2013 trend line A has acted as a support level. The general market environment has been bullish with the Dow holding above trend line A. The breakout above trend line C in January 2014 was an unsustainable rally.
The lower edge of the trading band is shown with trend line B. This trend line was confirmed in June and November 2012. The width of this trading band was used to calculate the potential height of the resistance breakout in February 2013 and the position of trend line C. Trend line C defines the upper limits of the trading channel. The current consolidation around trend line C is bullish.
This series of trend lines provides the analysis framework for the retreat, rebound and up-trend continuation. The longer-term Dow upside targets are defined by the resistance level created by trend line C. This has a projected value of around 17,000 in 2014 December. Trend line A has a projected value near 15,600 in December 2014.
A severe fall below trend line B will use trend line A as a support level. The current value is near 15,200. Investors should watch for support to develop near the lower edge of the long-term GMMA at 15,500. A rebound from the GMMA would present a buying opportunity.
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 CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.