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The Dow Revisited

10/19/10 11:47:25 AM
by Koos van der Merwe

Yes, I do watch the Dow like a hawk, simply because top analysts preach the bear on CNBC.

Security:   DWIX
Position:   Hold

In my last article on the Dow Jones Industrial Average (DJIA), I attempted to understand why experts like Robert Prechter and other well-known analysts are forecasting a double-dip recession. If you were following my chart, it would look like Figure 1.

FIGURE 1: DJIA. Here's the bear trend.
Graphic provided by: AdvancedGET.
As you can see, the resistance at 1083.79, a 72% Fibonacci extension level, never held, although there was a slight retracement before a break through the resistance level. This means that my bear projection is so much wishful thinking. However, further analysis shows that we are nearing a level where a correction could well occur, but not the Halloween correction that the bears would like to see.

Why am I expecting a correction? Look at Figure 2.

FIGURE 2: DJIA. Here's the suggested target.
Graphic provided by: AdvancedGET.
The DJIA broke above the resistance of wave 1 of Wave III and has risen to a price greater than 11,084.90, the Fibonacci extension of the movement of wave 1. Wave 1 of Wave III is 1156.27 (10760 - 9603.73) in length. The present length of wave 3 of Wave III is 1286.96 (11207.77 - 9920.81), greater than Wave 1. With the relative strength index (RSI) at oversold levels without giving a sell signal, we could well see the DJIA going higher to the 1.5% extension level of 11,666.94 or higher before a strong correction. Should this happen, there will be small corrections on the way up with a possible five-wave move, although on Figure 2, I have shown a minor five-wave count. How far could a fourth wave correction go? To answer this question, look at Figure 3.

FIGURE 3: DJIA. And here's a suggested wave 3.
Graphic provided by: AdvancedGET.
Figure 3 shows that Wave 2 of Wave III retraced 72% in a simple abc pattern. This means that the wave 4 of Wave III correction when it occurs should not fall below the 10,760.13 level. If it does, then it means that the DJIA is charting a wave (2) of Wave 3 of Wave III with the level 11,207 or higher being wave(1) of Wave 3 of Wave III.

Complicated? Yes, but it will signify that a major bull trend is under way, and that any correction is a buying opportunity.

Finally, do note that the 50-day moving average has broken above the 200-day moving average. Enjoy the Elliott wave count.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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