|The DJ Banking Index has been trending higher since October 2002 and looks to have started the fifth and final wave.|
|The weekly chart shows a distinct 5-wave pattern and rising price channel. Wave 1 peaked in Jan-03 (382), wave 2 bottomed in March 2003 (326), wave 4 peaked in March 2004 (492) and wave 4 bottomed in May 2004 (433). As is normally the case, wave 3 was the longest in both price appreciation and duration.|
|Weekly chart for the banking index.|
|Graphic provided by: MetaStock.|
|The daily chart provides evidence that the prior downtrend has ended (wave 4) and a new uptrend has begun (wave 5). First, the decline (March to May) formed a falling price channel and the index broke above the upper trendline with a strong advance the last three weeks of May. Second, the index exceeded 460, a resistance level confirmed with reaction highs in late April and early May (gray arrows). The index has since formed consolidation that looks like a flat flag of sorts. Watch 472 for an upside breakout and broken resistance (turned support) at 460 for downside break.|
Daily chart for the banking index.
|Should the index break consolidation resistance at 472, wave 5 would be further affirmed and traders can start to think of upside targets. Turning back to the weekly chart, the upper trendline of the rising price channel extends to around 550 over the next 2-3 months. In addition, wave 5 is often a Fibonacci portion of wave 3. This means that wave 5 could be 38.2% to 61.8% of wave 3 and would imply an upside target range between 496 and 536 (green box). |
Calculations: (492 - 326 = 166, 166 x .382 = 63.41, 166 x .618 = 102.59) and (433 + 63.41 = 596.41, 433 + 102.59 = 535.59).
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