A Look at the DJIA in the Intermediate Term

By: Ray Tato | Thu, Apr 6, 2006
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The DJIA has been in an intermediate advance since the October 2004 low at 9757, this is shown with a weekly close only line chart in CHART W #1. Within this chart, a series of higher and higher highs and higher and higher lows has occurred to mark this upward advance, thus giving the basis for a perceived healthy bull market. These highs and lows are shown in red lettering. But, is this a healthy bull market? And if so,... how healthy? To get a better view of the health of the trend, we turn CHART # 2, where I have drawn trend lines to show a possible Rising Wedge.

Notice the up-sloping trend lines in the chart below that intersect the tops of weekly closings at 10627, 10940 and 11279. These three points mark the upper boundary line of a possible Ending Diagonal that has formed with five reversals of the major trend labeled A-B-C-D and E, marked in yellow. The other two price points, 9757 and 10215, form the lower boundary line of this possible terminal pattern of converging trendlines. Why terminating? Because an Ending Diagonal is supposed to mean the market is topping out for a particular time frame. And the time frame we are talking about is the intermediate. If you look at the right side of the chart from reversal point (D) at the low end of the wedge to reversal point (E) at the top, notice that the price closed above the upper boundary line and then fell back into the wedge. Also notice that an a-b-c pattern formed to map out the advance from (D) to (E), or from a higher low to a higher high. Has the wedge pattern reached a terminal point? Is it down from here?

To get an idea if the DJIA is possibly on its way down, take a look at Chart # 3. Notice the a-b-c pattern once again. If you look at wave (C), this looks to be an excellent five wave advance; no wave overlap, wave (III) is the longest and incidentally, wave (V) ends as a 'throw-over'. In this case, wave (V) looks to have been thrown-over the upper boundary line of the Ending Diagonal. When a 'throw-over' happens, it usually means exhaustion, or an end to a particular trend on heavy volume. Can exhaustion happen with low volume? In this case it seems so.

Taking a look at the next chart, Chart #4 shows that half way thru the a-b-c corrective sequence, from the 10215 low to the 10667 higher low, volume increased considerably. But then, right after the weekly low was made at 10667, volume fell off a cliff. The question comes up: is this an accumulation/distribution pattern? It sure looks like it. So, what now? Is the rally that started from the 9757 weekly closing low in Chart #1, the long term target, if the lower boundary line near 10550 is breached? Yes! But we are a long way from that.

Will the price to volume divergence as shown above, be the catalyst that takes the DJIA lower, or will it take the combined efforts of the 'throw-over effect' - of which all three degrees of trend had a 'throw-over' at the 11279 upper boundary line area i.e., (Reversal (E) of the diagonal, wave (c) of the a-b-c correction and the fifth (IV) of wave (C) ), to act as the final phase to this intermediate trend? Or, could something else happen? There is one more chart I want to show, Chart #5. What if the Ending Diagonal fails and we go back up and close above 11279? Well, the all-time high would possibly be next. No? We will see.

 


 

Author: Ray Tato

Ray Tato

Disclaimer: Ray Tato or the Apprentice Technicians Outlook will take no responsibility for the accuracy of these source charts for price and time comparisons. They are the representations of an outside agency. I did not create the original content, supply the data needed or generate the original source charts for public viewing. I only try to convey what I see as a technical analyst. Nowhere in this abstract is there any indication to trade or invest. This piece is for educational as well as theoretical practice only. This is an exercise, and can in no way be viewed as a reason to put ones capital at risk. I do not advise you to trade based on this report.

Bio: Ray is an independent analyst and investor who began his education in the financial markets in 1985 by working on the floor of the Chicago Board of Trade. In 1999 Ray began his Technical Analysis studies at the Chicago Mercantile Exchange where he became a classical bar chartist. Along with charting, Ray like to study cycles and wave theory and mostly follows the DJIA. In his spare time, Ray plays blues on the harmonica. Ray lives in Chicago.

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