Today I'll show some more charts of some of the different stock market indices we looked at in our last Weekend Report. Last weekend we looked at a lot of the bull market uptrend channels that are still in place since the 2009 crash low. It’s always important to keep an open mind when it comes to the stock markets. Everyone can’t get in at the bottom and everyone can’t get out at the top. Plus, of course, there is the consolidation phase that trips up both bulls and bears alike.
Let's start with a daily chart for the Dow Jones Industrial Average (INDU). I’m showing a large trading range, below, that began during last August’s big decline labeled with the red #1.
The INDU then rallied back up to the 17,950 area, red #2, and started to form that seven point bearish falling flag which I thought was going to be a bull flag until the price action broke below the bottom rail, which led the the second low in January and February of this year and formed a double bottom, red #3.
The INDU has rallied strongly and is within 435 points of reaching the top of the trading range again. Just for argument sake, if the INDU reaches the top of the trading range it will have completed the third reversal point at 17,950, which would be an odd number of reversal points, creating a possible big double bottom. Keep in mind this is only one scenario at this time and there is a lot of work to do before we can even begin to call the price action a double bottom.
Below is basically the same chart as the one above, but this one has the moving averages on it. This past week the 20 day ema crossed back above the 200 day simple ma with the 50 day ema now rising strongly. During big trading ranges like this it’s not uncommon to see them cross back and forth before either the bulls or the bears set up the next impulse move out of the trading range. Once that happens they will get nicely aligned and will show the impulse move.
This next chart offers a weekly look at the INDU and shows an even bigger trading range going back over two years. It’s not the cleanest trading range I’ve ever seen, but the brown shaded support and resistance zones, as large as they are, have held on through multiple tests.
As much as the bears have tried on numerous occasions, they have not been able to move the INDU below the bottom of the support zone, starting way back in 2014. No matter how bearish things become, when the price action is trading down in the support zone the bulls manage to find a way to rally the INDU higher.
The same thing is happening at the top of the big trading range at the resistance zone. One slight advantage the bears have right now is they have created a lower high at reversal point #3 which may be deceptive as I’ll show you a minute.
I know many don’t see this next daily chart for the INDU as a possible outcome, but regardless of what I or anyone else may think, a setup is taking shape that could blow the roof off the INDU. Last week the INDU tested the top rail of a possible triangle consolidation pattern and backed off a bit, telling us it’s hot and should be respected at this point in time.
This is a critical inflection point for both the bulls and the bears. The bears need to reverse the price action and create another leg down and complete the 5th reversal point which would make this a triangle reversal pattern to the downside.
On the other hand, if the bulls are in control they should be able to move the INDU above the top rail creating a triangle consolidation pattern to the upside. Again, this scenario is still on the table with no confirmation in either direction yet, but it gives us a road map we can follow which is better than no road map at all. This big trading range is going to be one of two things: a consolidation pattern or a reversal pattern.
I would like to now show how this possible triangle consolidation pattern fits into the big picture of the bull market that began at the March 2009 crash low. As you can see from this longer term perspective chart, below, the blue triangle pattern is showing an indecisive trading range with a lower high and a higher low.
Until we see some type of reversal pattern form, the bull market remains intact. Maybe the 5th reversal point will hold and the triangle will end up being the reversal pattern. But—and there is always a but—since the INDU is in a bull market until proven otherwise, the odds favor a breakout to the upside. It’s also possible that the INDU declines from this point but finds support on the bottom rail of the blue triangle, forming a sixth reversal point similar to the bullish rising wedge which formed between 2011 and 2012.
One thing I’ll be watching very closely over the next several weeks will be how the price action interacts with the top rail of the blue triangle. The perfect breakout scenario would be to see the price action hit the top rail, then have a mild decline. In this way, if the bulls are truly in charge, the next rally attempt would take out the top rail on heavy volume. Then, for confirmation, I would like to see a backtest of the top rail from above.
The 20-year monthly chart for the INDU, below, does a good job of showing you the bull market that began in March of 2009. Until we see a reversal pattern of some kind form, it is what it is until proven otherwise.
I promised myself I wouldn’t post this next, long term monthly chart for the INDU as it has been frustrating watching the breakout and backtesting process over the last several years. As long term members know, I call this very large pattern on the INDU, THE JAWS OF LIFE, which is the opposite of how most analysts see it. Most call it the JAWS OF DEATH. You can see the blue triangle that is basically forming on the top rail which is generally a bullish development. This is about as clear a picture as you’ll see anywhere on the long term perspective for the INDU.
This last chart is the exact same chart as the one above, but this time I’m showing it as a line chart. I know how bearish most folks are on the stock markets right now, but when I look at this long term chart for the INDU I can’t view it as a bearish scenario at this moment. If anything it looks super bullish, especially if the blue triangle gets broken to the upside. This isn’t my opinion it’s what the charts are strongly suggesting.
Bottom line, keep an open mind to any eventuality that may arise.
