Update on Dow 8 April 2008

The Dow closed down 36 points last night.

However when I saw this in the morning I was quite relieved.

The reason why everyone was so edgy yesterday is because on Tuesday, the Dow tested the previous highs but later closed down near the lows forming a doji or almost a "gravestone" doji. This was a bearish signal based on candlestick charting. Psychologically it meant that the bulls were on the run but later lost control and prices closed where they began or near the lows.

Usually for candlestick charting confirmation has to be made with subsequent candlesticks.

So if last night the Dow had closed down strongly it would have more or less confirmed the bearish doji and hence a change in direction. However the Dow did not close down too strongly.

In fact it tested the 12525 level and it held. This is called a tweezer bottom as compared to the lows last Friday and on Monday. Will this be a support?

Secondly looking at the bigger picture, the consolidation from last Thursday up to yesterday still looks like a flag continuation pattern. The problem though is that within this flag are mostly high waves or rickshawmen and a bearish looking doji! These usually signal turns in candlestick charting. Although we know it is not that accurate.

There are views from other technical analysts that would prefer a drop back to the 50 day MA ie 12360 to give the flag a more downward sloping appearance before the next rally.

Nevertheless things are still looking very edgy. A drop below 12525 would certainly result in a drop down closer to 12360. Hopefully that level holds and rebound subsequently or else it would mean confirmation of the Doji formed on Tuesday!

We are not out of the woods yet. But last night's Dow close did not confirm anything bearish either.

Dow Trend Change?


Just for interest as I was just reading about this in an old issue of the Trader's Journal, there is this method to look for trend changes. Take the 10 day simple moving average (10 SMA), 20 day exponential moving average (20 EMA), and 30 day exponential moving average (30 EMA) and apply to the chart. In an uptrend move the 10 SMA>20EMA>30EMA. And in downtrend moves the 30EMA>20EMA>10SMA.

There are bowtie crossovers of these moving averages signals a change in trend.

If you look at the chart above those arrows drawn all point to bowtie crossovers. We have just had one not too long ago for the Dow. But then again these crossovers can be rather close together as seen by the 2 crossovers in the month of Dec alone.