DJIA 4/24/08 STOCK MARKET TECHNICAL ANALYSIS

Friday, April 25, 2008

DJIA 4/24/08 STOCK MARKET TECHNICAL ANALYSIS

OUTLOOK
After erasing early losses, the Dow closes higher by 85.73 pts (0.67%) as a US dollar rally sparks a market rotation from commodities to the financial markets. [Dollar Propels Dow to Highest Since January|CNBC.com | 24 Apr| 04:04 PM ET] . Thursday's headline numbers of index component 3M fail to measure up to Street expectations [3M Shares Fall on Disappointing Sales Growth|Reuters |Thu 24 Apr| 10:34 AM ET] while mixed economic data confounds investors and market sentiments. [CNN|Manufacturing activity declines in March|Thu Apr 24: 9:19 AM EDT] , [CNN|Jobless claims fall unexpectedly|Thu Apr 24: 8:49 AM EDT] , [AP|New home sales plunge to lowest level in 16 1/2 years|Thu Apr 24, 11:13 am ET] . For the past 5 trading days, the index attempts but fails to make a clean break from 12800. It continues to hover near the return line of the minor uptrend eager to challenge the larger declining trend. As long as the average stays within the price channel, a near term pullback will not diminish the validity of the uptrend and may be a good opportunity for the market to pause and gather momentum for a more decisive confrontation with the bigger trend instead of forcing a premature resolution. But that's just a thought. The market listens to no one and so we wait for an actionable signal. Everything hinges on which trend will prevail - the short term uptrend or the bigger intermediate downtrend. Be patient. Dow heavyweights Microsoft and Amex release earnings and guidance after the bell. [AmEx Beats Earnings Expectations, Revenue Climbs|CNBC.com |24 Apr| 04:31 PM ET] , [Microsoft Tops Forecasts, but Outlook Disappoints|CNBC.com|Thu 24 Apr| 04:19 PM ET] . These should weigh on tomorrow's market action.

MARKET BREADTH
Net Adv Issues: +845 * Net New Highs: -39 * Net Up Volume: +1,462,180,655

TECHNICAL ANALYSIS
Major consolidation * Intermediate downtrend * Short term downtrend * Next critical level is the intermediate trendline

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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

Friday, April 25, 2008