Originally published by Guppytraders
Throughout 2017 many observers were terrified the Dow Jones Industrial Average was going to collapse. There was nothing in chart behaviour that suggested this was going to happen and those who applied sound technical analysis were rewarded with an 24% return for 2017.
A year on, and investors want to know if this apparently unstoppable trend is at risk for 2018. Chart analysis assists with developing an answer.
The first observation is that a retracement in the Dow is a high probability. A retracement is when the market diverges significantly from the underlying trend and then falls, or retraces, to the underlying trend line. If the divergence between the current high and the underlying trend is very large then it is a bubbler collapse. The Dow is not in a bubble but without a retracement, a bubble could develop.
The value of the underling trend line which started in 2016, February is currently near 22,900 A retracement to this level would be uncomfortable for investors, but a rebound from the trend line support levcel is a buying signal for a continuation of the long term uptrend.
A retracement is a drop of less than 10% from the index high. A fall of more than 10% is a signal for a trend change.
This is a problem for the Dow trading near 24800. A 10% fall takes the Dow to 22,320 and this is well below the current trend line support value near 22,900. Additionally the 22,320 level is not associated with any historical support level. A fall below 22,900 finds the next strong historical support level near 20,400.
Investors will be alert for a market retracement dip to the value of the long term uptrend line. A strong rebound from the trend line is a buying signal. Payments for the US tax year are due April 15 and with the new lower tax rates passing the Congress this suggests that April may see a retracement dip.
Investors remain alert for the redevelopment of end of uptrend patterns. These include a rounding top, or a head and shoulder pattern. Currently there are no signs that either of these patterns is developing. The rally behaviour of the market following a retracement rebound may develop a early signal of a head and shoulder trend reversal pattern.
Often it is possible to analyse the index chart and use this analysis to set upside targets for the index. The DOW chart shows momentum characteristics but it does not provides a good method to set upside targets. In the short term the next upside target is near 26,200.
Daryl Guppy is a leading international financial technical analysis expert and special consultant to Axicorp. Guppy appears regularly on CNBC Asia and is known as "The Chart Man". Disclaimer: Daryl Guppy is not a financial advisor. These notes are for educational purposes only and provide an example of applied technical analysis.