DJIA 4/11/08 STOCK MARKET TECHNICAL ANALYSIS

Saturday, April 12, 2008

DJIA 4/11/08 STOCK MARKET TECHNICAL ANALYSIS

OUTLOOK
Stocks skid following a surprise earnings drop by index heavyweight GM [AP|Stocks Fall Sharply Following GE Results|Friday April 11, 5:37 pm ET]. The Dow opens sharply weaker and mostly slides for the rest of the trading session on higher volume. It gets clipped -256pts (-2.04%) today and -284pts (-2.25%) for the week. I find this week's market movement notable from a technical perspective. From an interrupted downtrend, the intermediate trend has transitioned into consolidation and I have annotated that accordingly in the weekly chart. Also, the charts issue a couple of important technical signals. Today's downtick breaks the one month uptrend to the downside. Very often, a trendline break is one of the best early warnings of a change in trend and an impending reversal, so it is very likely that we can see this occur in the minor cycle. This is not too far fetched if we view it from the bigger context of the current larger trend - a rectangular consolidation where price commonly bounces up and down the extremities of the range. Accompanying the trendline break in the daily chart is a top reversal signal in the weekly timeframe. Also known as a selling climax, this occurs in an uptrend, when a new high is set followed by a lower close on the same bar. Individually this signal is not important, but when considered in the context of other technical evidence, such as the minor trendline break and the intermediate range bound trend, it assumes significance. On this footing, the new near term price objective now becomes the bottom of the range 11,700. Here is a preview of next week's U.S. economic and earnings calendars.

PRICE AND TURNOVER
Close: 12,325.42 * Change: TODAY -256.56 (-2.04%) * WEEK -284.00 (-2.25%) * Volume: 908,321,280

MARKET BREADTH (NYSE)
Net Adv Issues: -1,885 * Net New Highs: -32 * Net Up Volume: -2,974,318,727

TECHNICAL ANALYSIS
Support 11,700 * Resistance 12,800 * Major consolidation * Intermediate consolidation * Short term uprtend * Rounding top on the weekly chart * Broken short term trendline on the daily chart * Reversal signal on the weekly chart * Price objecive 11,700

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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

Saturday, April 12, 2008