Dow Trend Channel Breakout

By Colin Twiggs
May 19, 2007 2:00 a.m. EST (4:00 p.m. AEST)

These extracts from my trading diary are for educational purposes and should not be interpreted as investment advice. Full terms and conditions can be found at Terms of Use.

USA: Dow, Nasdaq and S&P500

The Dow Jones Industrial Average broke through the upper border of the trend channel, accompanied by rising Twiggs Money Flow. Accelerating up-trends make big gains but normally end with a sharp reversal; so it is important to protect profits. Reversal below the upper channel line would signal that the trend is weakening; and a fall below 13200 would warn of a secondary correction. Respect of the upper channel line, on the other hand, would indicate that the trend has plenty of gas in the tank.

Channel lines on the chart below are not symmetrical: I have dragged the top channel line closer to the linear regression line because in this case data is not evenly distributed around the LR line.

dow jones industrial average medium-term chart

Long Term: The primary up-trend continues, with the first line of support at 12800 and primary support at 12000.

A readers question, as to why trend channels drawn on the short-term price chart did not coincide with the latest secondary correction and primary advance, prompted me to review my recent analysis of the primary trend.

Robert Rhea (The Dow Theory, 1932) defines a secondary reaction as "an important decline... usually lasting from three weeks to as many months, during which interval the price movement generally retraces from 33 per cent to 66 per cent of the primary price change since the termination of the last preceding secondary reaction." The key words are: an important decline. The duration and percentage retracement are merely guidelines. Rhea himself records secondary reactions as short as 7 days; and others where retracement is as low as 20 per cent.

The recent February/March reaction endured less than 3 weeks and is borderline one-third retracement. Nevertheless I believe that it qualifies as an important decline and should be considered a secondary reaction. Primary support levels have been revised accordingly.

Short Term: Short retracements and respect of the lower trend channel line (on the short-term chart) both signal trend strength. Large volume [F] is due to Friday's options expiry. Breakout below the trend channel, though not yet expected, would signal that the trend is weakening.

dow jones industrial average short term chart

The Dow Jones Transportation Average is consolidating below 5250, a bullish sign, but Fedex and UPS both display bearish consolidations (during a secondary correction) - hinting at an economic slow-down.

dow jones transport average

The Nasdaq Composite displays a bullish narrow consolidation above the first level of primary support at 2525. An upward breakout would signal a test of the upper trend channel, while a fall below 2500 would test the lower channel border and threaten primary support at 2340. Twiggs Money Flow (21-day) signals long-term accumulation, having respected the zero line for several months.

Long Term: The primary trend is up.

nasdaq composite

The S&P 500 found support at 1500 on Monday/Tuesday before resuming the up-trend. Expect a test of the upper channel border. Twiggs Money Flow (21-day) signals both long- and short-term accumulation after recovering above the April 30 low.

Long Term: The primary trend is up, with support levels at 1460 and 1375.

standard and poors 500

LSE: United Kingdom

The FTSE 100 is headed for a test of the upper trend channel after recovering above 6600. Twiggs Money Flow signals accumulation, holding well above zero.

Long Term: The primary up-trend continues. Reversal below 6400 is not expected, but would signal a test of primary support at 6000.

ftse 100

Nikkei: Japan

The Nikkei 225 is testing the lower border of the trend channel; a break below the channel line and 100-day moving average would warn of a test of primary support at 16600. A Twiggs Money Flow fall below zero would signal distribution. Recovery above 17600, on the other hand, would signal a test of the upper trend channel.

Long Term: The primary trend remains up.

nikkei 225

ASX: Australia

The All Ordinaries is rising above the upper border of the trend channel, signaling a fast up-trend. The downside is that fast trends are often followed by sharp reversals; it is advisable to protect profits. Bearish divergence on Twiggs Money Flow (21-day) warns of profit-taking.

Long Term: The primary up-trend continues, with support at 6000 and 5650.

all ords medium-term

Short Term: The bullish narrow consolidation continues: expect an upward breakout to test the upper channel border. Thursday's exceptional volume is largely attributable to unusual activity in Sigma Pharmaceuticals [SIP], with more than 94 million shares changing hands.

all ords short-term

A good plan executed now is better than the perfect plan tomorrow.

~ General George S Patton Jr.

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