DJIA 3/30/09 SHORT TERM REVERSAL

Tuesday, March 31, 2009

DJIA 3/30/09 SHORT TERM REVERSAL

TRENDLINES
*PRIMARY DOWN TRENDLINE
*INTERMEDIATE DOWN TRENDLINE | BROKEN TRENDLINE
*SHORT TERM UP TRENDLINE | BROKEN TRENDLINE

MOVING AVERAGES
*PRIMARY | MA180 DECLINING
*INTERMEDIATE | MA60 DECLINING
*SHORT TERM | MA15 ASCENDING

PRIOR SUPPORT/RESISTANCE
*PRIMARY | LOWER HIGH + LOWER LOW
*INTERMEDIATE | LOWER HIGH + LOWER LOW
*SHORT TERM | HIGHER LOW + HIGHER HIGH

INDICATORS AND VOLUME
*MACD | UPTREND | LOSING STEAM
*STOCHASTIC | UPTREND | OVERBOUGHT
*BOLLINGER BAND | CORRECTING TO CENTERLINE
*VOLUME | DECLINING SINCE MID MARCH

POTENTIAL PRICE TARGETS
*PERCENTAGE RETRACEMENT | 7000-7400
*BB CENTERLINE | 7240
*PRIOR SUPPORT | 6470
*MEASURED MOVE | 5900

ANALYSIS
Last week we had a sense that a correction is bound to appear after a 3week run up. The index has now closed lower for 2 consecutive days and we view this as a start of a near term reversal corroborated by weaking momentum indicators. How far do we think this new downleg will go? A few price targets can be gleaned depending on one's market outlook. If you are one of those excited by the positive MACD divergence (see previous post) that showed itself and is now predisposed to looking at the March low as the potential 'bottom' of this bear market , then you should be expecting a bounce between 7000-7400. If this happens, many will find it encouraging, but for technicians, this remains a long shot. Due to the declining bigger trends, i am constrained to view this near term reversal as a new short term downtrend that is a resumption of a new leg down in the intermediate trend all happening within the context of a primary bear market. Using the measured move method this fresh move down could reach the vicinity of 5900 sometime late April or May. A break below 6469 is a significant confirmation. Use intervening rallies to SELL.

Note: If GM and Chrysler are thrown into bankruptcy/liquidation soon the resulting negative financial and economic repercussions could provide a cathartic shock to the market that might potentially lead the way to an eventual recovery.

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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

Tuesday, March 31, 2009