DJIA 3/18/08 STOCK MARKET TECHNICAL ANALYSIS

Wednesday, March 19, 2008

DJIA 3/18/08 STOCK MARKET TECHNICAL ANALYSIS

The Dow explodes out of the starting gate on the heels of better than expected earnings announcement by Lehman Bros and Goldman Sachs. In the afternoon session, the index catches fire after a 0.75% Fed funds rate cut is announced and rallies to close at the high of 12,392.66. Today's big advance cuts down the provisional short term trend but stops below the intermediate trendline resistance. Technically, we can envision a number of potential scenarios. (a) One is that this correction rally breaking the short term trendline is happening in the context of the intermediate downtrend that can be expected to reverse at or near the trendline resistance. (b) Another is that this rally could continue and break the intermediate trendline only to be cutdown by the 12,800 resistance level possibly leading to another short term consolidation. (c) And of course, the most optimistic scenario is that after breaking the intermediate trendline, the index barrels thru the 12,800 resistance signalling the start of a significant reversal. As technicians, we need to step away from all the excitement, focus on evidence and make sure we do not get ahead of ourselves. The only objective evidence-meaning what has actually transpired-as of today is (a) the break of the short term downtrend line. The other two technical signals anticipated in "b" and "c" are, as of now, merely speculations of what could happen in the future. That doesn't mean that scenarios "b" and "c" won't come to pass, but until they do, we need to contend with the higher probability likelihood that this is a bear market rally. Technical analysis has always been about probabilities, never about certainties.

MARKET BREADTH (NYSE)
AdvDec: +2,649 * NewHighsLows: -110 * UpDownVol: +455,736,431

TECHNICALS
Major consolidation * Intermediate downtrend * Broken short term downtrend
Support: 11,600-11,700 * Resistance 12,800

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Whipsaw's Library

* CYCLES: A TRIBUTE TO J.M.HURST by Brian Millard

* ELLIOT WAVE PRINCIPLE: KEY TO MARKET BEHAVIOR by Frost and Prechter

* FIBONACCI APPLICATIONS & STRATEGIES FOR TRADERS by Robert Fischer

* FORECASTING FINANCIAL MARKETS: THE PSYCHOLOGY OF SUCCESSFUL INVESTING by Tony Plummer

* JAPANESE CANDLESTICK CHARTING TECHNIQUES by Steve Nison

* POINT & FIGURE COMMODITY & STOCK TRADING TECHNIQUES by Kermit Zieg Jr.

* PROFIT MAGIC OF STOCK TRANSACTION TIMING by J.M.Hurst

* TECHNICAL ANALYSIS EXPLAINED by Martin Pring

* TECHNICAL ANALYSIS OF STOCK TRENDS by Edwards and Magee

* TECHNICAL ANALYSIS OF THE FINANCIAL MARKETS by John Murphy

* TECHNICAL ANALYSIS: THE COMPLETE RESOURCE FOR FINANCIAL MARKET TECHNICIANS by Kirkpatrick and Dahlquist

TECHNICAL ANALYSIS EDUCATION

(Excerpts from J.Murphy)

BASIC PREMISE OF TECHNICAL ANALYSIS
1. Market action discounts everything.
2. Prices move in trends.
3. History repeats itself.

"The technician believes that anything that can possibly affect the price - fundamentally, politically, psychologically, or otherwise - is actually reflected in the price of that market. It follows, therefore, that a study of price action is all that is required. All the technician is actually claiming is that price action should reflect shifts in supply and demand. If demand exceeds supply, prices should rise. If supply exceeds demand, prices should fall. This action is the basis of all economic and fundamental forecasting."

"The concept of trend is absolutely essential to the technical approach. The whole purpose of charting the price action of a market is to identify trends in early stages of their development for the purpose of trading in the direction of those trends. There is a corollary to the premise that prices move in trends - a trend is more likely to continue than to reverse. Another way to state this corollary is that a trend in motion will continue in the same direction until it reverses. " (p.3)

"Much of the body of technical analysis and the study of market action has to do with the study of human psychology. Chart patterns, for example, which have been identified and categorized over the past one hundred years, reflect certain pictures that appear on price charts. These pictures reveal the bullish or bearish psychology of the market. Since these patterns have worked well in the past, it is assumed that they will continue to work well in the future. They are based on the study of human psychology, which tends not to change."

BASIC TENETS OF THE DOW THEORY
1. Averages discount everything.
2. The market has 3 trends.
3. Major trends have 3 phases.
4. The averages must confirm each other.
5. Volume must confirm the trend.
6. A trend is assumed to be in effect until it gives definite signals that it has reversed.

TREND FOLLOWING
"The whole purpose of charting the price action of a market is to identify trends in early stages of their development for the purpose of trading in the direction of those trends."

SPOTTING REVERSALS
"The most difficult task for a Dow theorist, or any trend follower for that matter, is being able to distinguish between a normal secondary correction in an existing trend and the first leg of a new trend in the opposite direction." (p.29)

REVERSAL SCENARIOS (p.29)
1. Failure swing
2. Non-failure swing

CLASSIFICATION OF TRENDS
1. Major (or primary)
2. Intermediate (or secondary)
3. Near term (short term or minor)

TRADING TIME HORIZON
"As a general statement, most trend following approaches focus on the intermediate trend, which may last for several months. The near term trend is used primarily for timing purposes. In an intermediate uptrend, short term setbacks would be used to initiate long positions." (p.54)

THE ELEMENTS OF SUCCESSFUL TRADING
1. Price forecasting
2. Trading tactics
3. Money management

TRADING TACTICS
1. Tactics on breakouts
2. The breaking of trendlines
3. The use of support and resistance
4. The use of % retracements
5. The use of gaps

MONEY MANAGEMENT
1. Maximum loss limit per trade
2. Risk reward ratio
3. Fund allocation

PROTECTIVE STOPS
"For purposes of placing protective stops, support and resistance levels are most valuable." (p.401)

BUILDING BLOCKS OF TECHNICAL ANALYSIS
1. Support and resistance
2. Trendlines and channels
3. Percentage retracements
4. Speed resistance lines
5. Gaps
6. Reversal days

(Excerpts from M.Pring)

ONE AND TWO-BAR PRICE PATTERNS
One and two-bar patterns reflect changes in psychology that have very short term influence on prices.

1. Outside bars
2. Inside bars
3. Two bar reversal
4. Key reversal bars
5. Exhaustion bars
6. Pinocchio bars

Wednesday, March 19, 2008