Thursday, October 1, 2009

Dow - Monitoring the two lines


Dow has been moving within two trend lines U-P and X-Y since end of July. The main task at this moment is to see which trend line Dow is going to break. If the breakout is on the upper resistance line U-P with high volume, there is nothing to worry, Dow is on its major wave (III) journey, there is still a long way to go for the bull. The worry is when Dow breaks the lower support line X-Y.


If the lower support line X-Y is broken, I can see two possible outcomes for Dow. The first one is as shown below if Dow can stop at support line L-T to complete its major wave (IV).

The second possible outcome is very bearish where Dow proceeds to break the second support line L-T as shown below. Last week's height of 9829 marks the end of the bear market rally.

March's low of 6547 is wave A of the bear market that started in October 2007. September's height of 9829 is wave B (50% rebound). Wave C will have to go lower than 6547. If Dow were to drop 50% from 9829 then Wave C will end at around 5000. All these looked unlikely at this moment but don't forget when Dow started to drop in October 2007, nobody could foresee the bankruptcy of Lehmen Brothers; Citigroup to drop from $48 to $1 and Las Vegas Sands from $145 to $2. Be careful.

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