|The broadening top formation has a series of higher highs and lower lows and is considered fulfilled when it breaks to the downside, outside of the lower trendline. Because it is such a wide-reaching pattern, a mere touch or test of the lower trendline has substantial implications even without a downside break. Should a downside break occur, the height of the pattern subtracted from the downside breakout point gives you the approximate target.|
|However, the mitigating condition here is aptly shown by a powerful line of support: the 200-period exponential moving average (EMA) is currently at 10,142. We can easily conclude that as long as the Dow Jones Industrial Average (DJIA) remains above this often-watched harbinger of support, the uptrend is intact. Note how the upper trendline and the 200-day EMA roughly relates to a rising channel (Figure 1). But keep in mind the old saying that "what goes up must come down."|
|FIGURE 1: DOW JONES INDUSTRIAL AVERAGE, WEEKLY. This is a sobering view for the DJIA should the markets turn south.|
|Graphic provided by: StockCharts.com.|
|As the DJIA is very near the top trendline, a lower test soon is a very real possibility. The magnitude of this test has a wide range of correction. The first line of potential strong support involves a drop of 934 points to the 200-day EMA.|
Support here would be bullish for another ride up to the top trendline. A trading strategy for this index could be to take profits near this top trendline and then reload when convincing support is found. Figure 1 suggests if the bears take control, then another 1,000-point drop could evolve, should the lower trendline come into play. Under super-bear conditions, the lower pattern fulfillment target becomes 7500. This deep retracement would test 2003's hammer bottom.
|Several indicators are considered on this chart; note the weak trend displayed at the top graph showing the average directional movement index (ADX). This ongoing trend would suggest at best a sideways drift with the potential for an eventual downleg. The lower indicators are also cautionary. Both the moving average convergence/divergence (MACD) and the relative strength index (RSI) show a general negative divergence to the index's higher peaks forming the top trendline. Finally, the stochastic oscillator shows an overbought condition in the 80 area, hinting at an overdue downleg.|
|The view here is that there is more downside potential here than upside promise. Should the market's big-money players also take this view, then the downside has dangerous implications. Will the 200-day EMA hold? Stay tuned.|
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