Dow Jones Chart – Pick Your Trading Channel

I charted the Dow Jones Industrial Average ($DJIA) on December 31, 2009 after it closed for the year at 10,428.05 and see two distinct trading channels still intact.

I highlighted the longer trading channel with blue trend lines and the shorter trading channel with black trend lines.  New Year’s Eve ended with the DJIA on the blue line of higher lows which would make a technical analyst think it would be time for another leg up.  The trick is that the latest consolidation (area between the black lines) might not be complete yet.  The first week of the 2010 is going to make this chart incredibly interesting.  The black trend line of slightly higher highs and the six month blue trend line of higher lows cannot both continue to hold resistance and support though the week without one giving way.  If the black line breaks we could see the DJIA trade up to 11,000 before finding resistance again at the five month blue trend line of higher highs.  If the blue line breaks support the next stop is less than 200 points from the current levels, around 10,250 (+- 20 points).

The 50, 100 and 200 day moving averages (dma) offer more support below the trend lines.  The 50 dma is almost exactly in line with the lower black trend line and has been strong support for the past three months.  The longer term trend lines make it more interesting again.  Both the 100 and 200 dma are moving higher, but are farther from the recent highs for the Dow.  The 100 dma is about 5 1/2% lower than the 52 week high (10,580.44 intraday on 12/29) which has been close to the mini-correction levels for the current rally.  That gives it some credence, but at some point we’ll need a bigger correction to make this a more comfortable market for the masses.  That’s where the 200 dma comes in.  It’s currently around 12 1/2% below the recent DJIA highs.  A correction down to that level would give many hesitant buyers two reasons to buy, a 10+% correction and a reversion to the mean.

Last, but not least, I circled the latest change in the Williams %R indicator.  Typically a drop below overbought for both the 14 and 28 day periods can be a red flag.  That didn’t hold true in mid-December when both the lower blue and black trend lines mentioned above met the DJIA on the same day as %R was giving in.  At the end of the year %R showed it was cracking again, this time on very weak holiday volume.  I suggest paying attention to this indicator this week along with the trend lines to get a better idea of where the Dow could move over the next couple of months.

I see an opening for 600 points to the upside or 1200 points to the downside during January or soon after.  That gives the bears a little bit of a probability edge, especially when you consider the moving averages and %R.  If the DJIA surprises me and hits 11,000 before 10,000 I think it could be a time to consider shorting the markets for a short period.  Have your trading fingers ready, this is going to be a busy week!