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Dow rally and retreat pattern offers trading opportunities, chart analysis shows

Dow Jones sign
Scott Mlyn | CNBC

The Dow Jones industrial average offers rally-and-retreat trading opportunities between 16,000 points and 18,290, chart analysis shows.

Between March and May 2015 the DOW hit resistance near 18,290, developing a shallow rounding top pattern before plummeting in August.

The retreat then reached the rounding top pattern target near 16,000 and stabilized in this area, before a rally in October reached 18,000. It then retreated again, retesting the support level near 16,000.

This rally-and-retreat behavior has created a broad trading band between 16,000 and 18,290, which in turn sets up three different development scenarios for the Dow.

The first scenario is a continuation of the rally-and-retreat behavior within the trading band. The rallies are easily defined with a trend line so a close below the uptrend line is a signal to go short. A reaction away from the upper resistance level near 18,290 is also a signal to go short.

In a similar fashion, a rebound from support near 16,000 is a signal to go long. These are simple trading strategies that have delivered consistent, reliable results.

The second scenario is based on a bullish breakout above 18,290. A breakout is signaled when the weekly candle closes above 18,290 and is confirmed when the index retreats and uses the 18,290 level as a rebound support level.

The target for this type of breakout is calculated by measuring the width of the trading band and projecting the value upwards. This gives an upside breakout target near 20,500.

This is a long term target, however. It took the Dow 13 months to move from 16,000 to 18,290 and a similar time frame may apply to a move towards the trading band target of 20,500.

The third scene trio is bearish, and is triggered by a close below 16,000 on the weekly chart. This gives a measured downside target near 13,600. As with all falling markets, this target can be achieved more quickly than the bullish targets.

The problem with the current chart behavior is that there is no tip in the balance of opportunity outcomes and no chart pattern that suggests neither a developing bullish nor bearish breakout.

Investors should remain alert for these patterns, particularly as the index moves towards 18,290 resistance. We continue to use the ANTSYSS trade method to extract good returns from these rangebound index movements and until these patterns develop, traders will continue to pursue the rally and retreat trading opportunities within the trading band.

Daryl Guppy is a trader and the author of The 36 Strategies of the Chinese for Financial Traders, available at www.guppytraders.com. He is a regular guest on CNBC's "Street Signs" and a speaker at trading conferences in Asia Pacific and Europe.

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