If anyone can win a trade war, then somebody forget to tell the Dow. The opening shots of multiple trade and tariff wars have been fired at friend and enemy alike and the Dow does not like what it sees. The threat of those trade wars was enough to bring to a crashing bend the multi-year uptrend in the Dow in 2018 February. The Dow has never fully recovered, although it has not yet started a new downtrend.
The 2018 fall in the Dow set the downside edge of a trading band. That is near 23,300. In a strong bull market this fall would be followed by a strong rebound and a continuation of the long-term uptrend. That did not develop.
Instead, the Dow developed a weak rebound that encountered strong resistance near 25,400. That has formed the top of a new trading band. The strength of the trading band was confirmed in June with the Dow retreat from 25,400.
The Dow had a strong and consistent uptrend that started in November 2016 and ended in January 2018. Since that month, the Dow has moved in an unremarkable and lethargic sideways trading band. There have been strong rallies from the bottom of the band to the top of the band. They have been followed by equally strong retreats and retests of the trade band. In an important sense this activity shows indecision. The market does not welcome Trump's trade wars, but it doesn't firmly oppose them either.
If the trade wars were welcomed, then the Dow would resume its uptrend with a strong and steady breakout above the upper edge of the trading band. That breakout would have an initial target near 27,500. The target is calculated by taking the width of the trading band and projecting it upwards.
If trade wars were unwelcome, then the reverse applies. The Dow would move decisively and quickly below 23,300. The downside target for that retreat would be 21,200 and is calculated using the width of the trading band.
Those chart pattern targets are important, as are the upper and lower levels of the trade band. They are significant because a breakout above or below the trading band often signals a very rapid move toward the target levels. Traders who go long in anticipation of a rebound from 23,300 would need to rapidly cover their long positions if the market moved below 23,300.
The potential for a rapid breakout above or below the trading band levels means that investors need to exercise caution as the Dow approaches those levels. It’s better to wait for confirmation of a continuation of the trading band pattern or of the breakout, before taking a position.
Traders continue to trade the retreat towards support near 23,300. We use the ANTSSYS trading method for this.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, which can be found at www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe. He is a special consultant to AxiCorp.
For more insight from CNBC contributors, follow @CNBCopinion on Twitter.