Picture perfect trendlines
The Dow Jones industrial average took a very hefty fall today back down to its recent support line. For the last two months the average has traded in virtually the same trend and found comfort in the same support area. Now that we’re on such a critical level it is important to look at how the market has acted to see if we can find out if the market will be using this line to bounce higher or if its going to fall through to retest previous recession lows.
This is the first time that the Dow has touched this level without bouncing back the very same day. As the chart shows below, each candlestick has a very long wick which shows how strong this trendline is generally.
After the previous touches I would normally be bullish with a chart formation like this. Instead I’m prudent in the sense that no bounce was found after the market sank throughout the day. Late trading continued in the negative direction with a few small gains in between that were simply too small to matter.
Each red dot on the chart designates a gap down in trading. The overwhelming majority of the gaps in todays trading were at the end, all of them down with zero gaps up during this period. The worst part about this chart is the obvious gap as the market hit 8000. As we know, gaps generally become very strong horizontal support or resistance lines. The only way to avert this tomorrow is if the market can gap up overnight to open above 8000.
If the market gaps above 8000 I think it would be safe to buy at 8000 with a very tight stop at 7990. Tight stops are required only because of the downside risk with a fall through 7990. Because all the other indices are reaching for multi-year lows while the Dow is touching familiar territory, a correction in the Dows value relative to other indices is surely in order.
