DJIA 4/16/08 STOCK MARKET TECHNICAL ANALYSIS

Thursday, April 17, 2008

DJIA 4/16/08 STOCK MARKET TECHNICAL ANALYSIS

OUTLOOK
The Dow rallies strongly on the back of better than expected earnings announcements from index heavyweights [Stocks Rally to the End|CNBC.com|16 Apr 04:53 PM ET] . Intel, JP Morgan Chase and Coca Cola top estimates and raise guidance [Intel stock climbs on Q2 forecast|Wednesday, April 16 1:37 PM PDT] , [JPMorgan Chase top forecasts|Apr 16: 12:50 PM EDT] , [Reuters|Coca-Cola tops estimates|Apr 16, 3:07 pm ET] . The stock market cheers and ignores the glum economic headlines [Consumer Prices Rise|Reuters|16 Apr| 08:53 AM ET] , [Fed Sees Weakening US Economy|Reuters|16Apr| 03:14 PM ET] . Yesterday's ODR alert [Whipsaw|DJIA 4/15/08] lives up to its name and today's 256.8 pt advance signals a confirmation of the swing reversal. The rising turnover and positive breadth indicators imply broad participation. The Dow returns above the broken short term trendline and the following technical signals become apparent in the daily chart. Today's market advance (1) confirms the validity of yesterday's ODR, (2) implies that the index has started a fresh upswing, and (3) establishes that the index found a new minor support yesterday. (4) Also, the Dow's close near the highs implies that the buying may not be done and could spill over tomorrow. Positive earnings announcements by IBM and EBay after the closing bell seem to support this sentiment [IBM profit rises|Apr 16 4:24pm EDT] , [EBay profit rises 22 pct|Apr 16 7:15pm EDT] . All these factors insinuate to shore up the momentum of the fresh upswing. The bigger trends remain in consolidation though so there is no need to revise our price objective. Technically, this optimism is confined to the short term trend, for now.

PRICE AND TURNOVER
Close: 12619.27 * Change: +256.80 (+2.08%) * Volume: 734,007,168

MARKET BREADTH
Net Adv Issues: +2262 * Net Up Volume: +2934804486 * Net New Highs: +57

TECHNICAL ANALYSIS
Major consolidation * Intermediate consolidation * Short term uptrend * Support 11700 * Resistance 12800

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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

Thursday, April 17, 2008