Charting Asia

As Dow breaks 17,000 uptrend may consolidate

Adam Jeffery | CNBC

The closed above 17,000 for the first time in early July on the back of a strong U.S. jobs report. Sturdy upward momentum has seen the index post a series of fresh all-time highs this year but charts suggest momentum may be set to slow.

A few months ago we suggested the DOW had an upside target of 17,000. This target has been achieved, marking a continuation of an exceptional uptrend but chart analysis suggests this upward momentum may slow and consolidation may develop around the value of the uptrend line.

The strategic trend and the significant feature of the DOW is the up-sloping trading channel defined by three trend lines. The upper trend line is trend-line C; this will provide support for the DOW as it retreats from 17,000.

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Trend-line A forms the middle core of the pattern and is the most well-defined trend line. It starts in February 2011, acted as a resistance in July 2011, and again in April and September 2012 before the DOW broke above this level in February 2013. Starting from February 2013 trend-line A has acted as a support level. The general market environment has been bullish with the DOW staying 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 breakout above trend-line C is bullish but it is unsustainable. There is a high probability the DOW will retreat and use trend-line C as a support level.

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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 trend line has a projected value of around 17,000 in December 2014. Investors should watch for trend-line C to act as a support level with the DOW clustering around this line. Clustering behavior includes dips below the line as occurred in February and April 2014. Clustering also includes limited moves above the line as occurred in May and June 2014.

There is a low probability of a strong rally continuing above trend-line C. The DOW does not show any chart patterns which signal an end to the up trend. These 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, nor is there any evidence they are developing. The market will consolidate around the value of trend-line C. The very fast rally move will not continue but the market will not collapse.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.