Don't lose faith, the Dow uptrend is intact

The Dow Jones Industrial Average posted its largest annual gain since 1995 last year and while momentum has slowed the index touched an all-time high in July and is up 3 percent year-to-date. Investors are questioning whether the rise has run its course but charts suggest the uptrend is intact.

The Dow's recent decline from 17,151 to 16,333 was only a minor retreat and is part of the trend consolidation pattern along the upper edge of a long-term trading channel. The index fell 4.8 percent; a technical correction is a fall of over 10 percent.

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Upward momentum has slowed a bit and consolidation is developing around the value of the uptrend line. There are two significant trend features on the Dow chart.

The strategic trend and significant feature of the Dow is the up-sloping trading channel defined by three trend lines. Trend line C, the upper trend line, provided support for the Dow as it retreated from 17,151. The index did not move far below this trend line, which suggests trend line C is a very significant feature of the Dow's uptrend strength.

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Trend line A, the most well-defined trend line, forms the middle core of the pattern. It started in February 2011, acted as resistance in July 2011 and again in April and September 2012. The Dow broke above this resistance level in February 2013.

Starting in 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 breakout above trend line C was bullish but unsustainable. The Dow's retreat to trend line C as a support level was not a surprise and there is a high probability the Dow will continue to cluster around trend line C. This confirms a continued bullish outlook for the Dow.

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This series of trend lines sets the analysis framework for the uptrend continuation. The longer-term Dow upside targets are defined by the resistance level created by trend line C. This has a projected value of between 17,000 and 17,500 in December 2014, which includes the upper and lower sections of the consolidation clustering activity around the value of trend line C. Clustering behavior includes dips below the line as occurred in February, April and August 2014. Clustering includes limited moves above the line as occurred in May, June and July 2014.

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.