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CHART ANALYSIS


Monthly Dow Shows Early Signs Of Trend Change

06/16/03 11:03:15 AM
by Gary Grosschadl

Normally longer term trend changes are announced by a series of higher lows and higher highs on a monthly chart and the Dow finally shows this.

Security:   $INDU
Position:   N/A

The small green elipses show that the Dow has just accomplished a higher high and has put in a higher low previously. However to make a stronger case traders should try to confirm this by other means. Indicator analysis provides some confirmation here.

The 12-period MACD or moving average convergence divergence shows the first bullish cross since the year 2000 and this is noteworthy. Developed by Gerald Appel, this indicator has stood the test of time and most if not all technical traders are familiar with it. It is considered a trend strength indicator because it uses moving averages but it takes the form of an oscillator by construction. Using the most common settings of 12-26-9 you get the plotted MACD line which is actually the difference between the 12-period and 26-period (in this case the period is a month) exponential moving averages. The 9 setting refers to the smaller blue signal or trigger line which is the 9 period EMA of the MACD line. A bullish signal occurs when the MACD line moves above its trigger line. I often use a quicker / shorter setting of 5-15-9 on daily and weekly charts and show this as comparison. Like all shorter period signals they are more prone to whipsaw signals as a result of the added sensitivity. The previous upleg triggered a buy signal on the 5-15-9 but not on the longer series. This hints that this upleg drive will be more meaningful than the last one.

Multi year monthly Dow chart.
Graphic provided by: stockcharts.com.
 
The other trend strength indicator shown is the uppermost one being directional movement. Its three components are ADX, +DI and -DI. The black ADX line shows the strength of the current trend. This line has now started to come off its peak so this is an indication of the likelihood of a coming trend change.

The converging of the DI lines help to confirm this and reflect bullish strength rising (+DI)while bearish strength wanes (-DI). For a longer lasting or true trend change, the DIs have to actually cross and the ADX eventually move between them and start to upslope. There is sometimes this fails by the stall action of the DI lines refusing to cross. Something to be monitored.

So what are reasonable upside targets from here? To answer this I have chosen two target areas. The first is the 50 % Fibonacci retracement level (~ 9470) derived from the recent low to the previous high. If this area is bullishly taken out then I see the psychological 10,000 level being the next bigger target. Actually the red pitchfork lines suggest this is more than a big round number target since it closely resembles a move to the forks median line. Followers of this technique use three pivot points to establish fork like lines of support and resitance. One guideline is that 80 % of the time a bullish move off the lower tine results in a successful touch or near touch of the median line. An exceptionally strong move through this center line may bring the upper median line into play. That is the super bull scenario - a move towards 12,000.

Before any of this occurs of course the immediate concern is the 50-period EMA line at 9155. The Dow must move past this line and this could be an early stall danger. This brings us to the other displayed indicators...the RSI (relative strength indicator) and the stochastics. These are oscillators that are non trending and work best in rangebound markets that reflect movements between overbought and oversold zones. They still have merit as they help to identify turns, the caveat being that in strong trending markets they can stay overbought or oversold for extended periods of time.

In summary this monthly chart has a bullish tone but my bones tell me to watch that 9400 - 9500 area carefully as this could be a likely spot for a more vigorous retracement. This retracement may even come down to test the lower tine on the pitchfork meaning a drop of at least 1000 points. As bad as that may sound, if the Dow were to come down to that level and hold support the trend is still up.

The market doesn't care what we think will happen so we have to listen to the actual music of the marketplace as we progress from here. Strong signs that are either bullish or bearish have to be respected.

Technical analysis is all about thinking in probabilities and possibilities and this helps us to stay alert to what is actually unfolding.



Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

Website: www.whatsonsale.ca/financial.html
E-mail address: gwg7@sympatico.ca

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