Charting the Dow – 9/7/07

No bulls could say last week was fun.  I personally took nearly a 2% loss on paper, but had no realized losses which is what actually matters.  I’m not frazzled by that paper loss or my theory that the Dow will continue to drop to retest the lows from four weeks ago.  That’s only ~600 points away and then the Fed should come in and give another boost around that time.  Most of my naked puts are still out-of-the-money (OTM) which gives me a good cushion still and will reduce the prices when I’m ready to re-write new options in a couple of weeks.

Looking at a weekly chart for the past year of the Dow Industrials ($INDU) I see hope not too far away.  The first point I looked for was the trend line of higher lows that’s in need of a new retest.  I labeled that line A and circled the current price in red.  That’s where I think we’re headed in the near-term.  We had a good sized pull back on Friday, but the volume for the week was less than average, see the green circle at the bottom right.  The ceiling for last week was the same one that has held us back the past four straight weeks, that line is labeled B.  Line C could be a short-term bump in the road back towards 12,500 as it has been the declining line since May, not counting the short lived correction from four weeks ago.  Line D is the longer trend line that will likely stop any run away train full of bulls.  I penciled in a thin line that formed from the slightly higher lows of the past three weeks.  I’m interested to see if that will amount to anything as the masses of “big money guys” come back from their summer vacations next week.  The last potential bump before 12,500 is the 50 day moving average that is currently in the neighborhood of 12,750.

The VIX crept back up to close Friday at 26.23 while its sister from the NASDAQ, the VXN, came all of the way up to 29.22.  A little extra fear in the market is good.  That helps to show everyone is paying attention.

Click on the thumbnail below to see a full sized chart:

Last thought, the debate on recession and the Fed rate cut is interesting to watch.  I thought these two articles from MarketWatch and Yahoo News were worth reading.

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