This market is at an extremely interesting point. Up or down is the question on everyone’s lips.  To try to make sense of this I will try to use elements of the famous “Dow theory” to help us asses where we are.

Analyzing the S&P-500, Dow Jones Industrials and the Dow Jones Transport together will enable us to get a good view of the market.  This should be part of your daily regime, in fact the first thing you check every day.  Being in cash when the market decides to turn down is ideal and buying stock on the upturn is optimal.

The chart chart below show us the current state as at 12 November 2009.

What do you see?  Here’s what I see.

S&P500

• Resistance at1100 points still with the possibility of a rising head and shoulders top.
• possible retracement to the neckline of the head and shoulders and a downwards break through this could be very bearish especially on rising volume.

DJ-30 Industrials

• Here we see the 3 month channel the Industrials are currently in
• a break of the channel either up or down will give a strong sign
• price looks to be turning down at resistance.

DJ20 Dow Transports here it gets really interesting !

• Technical analysts call this a Megaphone Top, or Broadening Triangle.
• This is quite a rare pattern and significant
• however this is known as a failing megapone top as the top resistance line is not rising.
• this suggests significant indecision in the market place and a pentration of either of these lines will signal the direction of the market at least for the short to medium term.

So what do we know?

We know all 3 indexes are at major resistance points.  All 3 look to be making a reversal.  A strong break through the upper resistance lines will be significant as we are approaching normally a good time of year for stocks, and the market could take off from here.

Using the Dow Rule :” The Indexes must confirm” we see that the DJ-20 is not confirming the new high made by the DJ-30.  It may do this in the future but today this is not the case.

Also on  all indexes we have diminishing volume, oversold conditions and a perception that such a sustained 8 month move without significant pullback is dangerous.

I am ready to pounce and move all my funds back into the market, but only when the market gives me a clear signal. Keep visiting Liberated Stock Trader and we will help you decide for yourself based on the weight of evidence when that signal will come.

Probability says the short term (days to weeks) will be down.  If the resistance line are broken on the upside then this could be another story.  But stock traders work on probabilities not certainties as few things outside death and taxes are ever certain.

Name: Barry D. Moore

Bio: Certified Technical Analyst (Stock Market Technical Analyst), Full Member of Society of Technical Analysts (STA) Level II CFTe (Certified Financial Technician), independent trader, author, trainer & blogger.

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