This is an after the fact analysis. In hindsight things look clearer and they provide an understanding that is very useful in analyzing emerging patterns in the future.
Dow made a four year high of 13,289 on March 16, 2012 – Point X in the chart below. Then it retraced to 13,002 (Point A) by March 23rd – a 50% (52% to be precise) pullback of the up move from the recent low of 12,735 (Point W) reached on March 6th.
By April 2nd – in a test of March high – Dow reached 13,297 (Point D) via an ABCD pattern. In this specific case, CD move was almost equal to AB move (101%)
After making a Double Top on April 2nd, Dow broke the neckline support of Point A on April 9th. In a measured move it reached the low of 12,710 (Point A1) on April 10th. The move after the break was almost equal to the move from top to neckline – X to A (102%).
Point A1 was also a test of March low (Point W). After testing this low, Dow again tried to take out the April high reaching 13,338 (Point D1) via another ABCD move (A1B1C1D1 on the chart), albeit in this case CD is not equal to AB, rather it is 1.17 times of AB.
After failing to take out the top in its third attempt (Point D1) – making a Triple Top – Dow retraced back (Point Y) to retest recent low, thus forming a horizontal channel.
These chart patterns did provide few tradable opportunities – some very risky others not so.
The first trading opportunity was going long after Point A – a high risk one. On March 23rd (Point A), Dow dipped below the low of March 22nd but finished in green. This is also at 20-Day EMA, a reasonable support level in an uptrend. This is the setup candle. The entry would have been next day when Dow crossed above the high of setup candle. The T1 target would be the recent high – 189 Dow points away. The stop would have been below the low of setup candle – 98 points. Almost 2-to-1 reward to risk ratio. T1 was reached after five trading days.
A second trading opportunity was going long after Point C – using ABCD pattern as a basis. Point C is again at the 20-Day EMA support; move from B-C was 89% of the move from A-B; and the candle at Point C (March 29th) was a hammer. This is the setup day. The entry would have been next day when Dow crossed above the hammer high. The T1 target would be the recent high – 137 Dows point away. The stop would be below the low of the setup candle – 119 points away. The reward to risk ratio is only 1.15. T1 was reached after two trading days.
The third trading opportunity was going short after Point D – a high risk one as the Dow is in a strong up move. The green candle on April 2nd – Point D – briefly thrust up the March high and then closed below that resistance level. Next day when Dow breached the low of April 2nd forming a Wyckoff Upthrust. The entry is the breach of Point D low or close below it. First target (T1) would be the intermediate low but a better target is the measured move from the Double Top (T2). The stop is above the high of Point D. Stop is 144 Dow points away, T1 is 151 points away, and T2 is 446 points. T1 was reached in two days and T2 in four.
The fourth trading opportunity was going short after the breach of Double Top neckline – a more conservative trade. The entry would be on April 9th after the breach. The stop would have been above Point D and the target would be the measured one for the Double Top. T1 is 295 Dow points and the stop is also same. T1 was reached in two days.
The fifth trading opportunity was going long after A1 – a very risky one. Despite an uptrend line break and a recent Double Top, Dow is still at a support level – March low at Point W and also the support made on February 15th in the same support zone. The measure move of the Double Top has been reached so it may bounce back. The upward trend from the last fall has been quite strong so bulls are not going to give up so easily. The next day’s candle was a green one, which opened at the low and closed in the top third and never challenged the previous day’s low, making it a good setup, nevertheless, a low probability one. The entry was when this setup high was breached next day. The T1 target is the low of Point A, which became a resistance and the T2 target is the recent high. The stop is below the low of setup day. T1 is 157 points away, T2 is 452 points away and the stop is 129 points. The T1 was reached after four days and T2 after a nervous 15 days.
The sixth trading opportunity is after Point C using ABCD pattern as a basis. The move from B1 to C1 is 68% between 62.8% and 78.6% Fibonacci level. The green candle after it closed at or above the 20-day EMA. This is the setup candle. The entry is when the high of the setup is broken next day. The target is the recent high or the measured move – both are within each other. The stop is below the setup day low. T1 is 216 points away and R1 is 124. T1 was reached in four days.
The seventh trading opportunity is going short after D1 made on May 1st. It made a Triple Top, briefly thrust up the resistance and then closed below it. Next candle is a Dragonfly doji, making it the setup day. Doji indicates the market indecision. The entry was when the low of this doji was broken next day. The T1 target is the low of C1 and T2 target is the low of A1. Stop is above the D1. T1 is 346 points away, T2 is 482 points and the stop is 147 points away. T1 was reached in four days and T2 is not yet reached. At present, Dow is at the channel support line and in a short-term oversold region. We can either tighten our stop to the high above B1 or at breakeven. We can also take our profit now as the Dow has declined for six straight days and in an uptrend it is short term bullish.
If one is looking at the range trading trading then Dow may be setting up for a long trade.
The analysis of the last few weeks chart action gave us few short-term trading opportunities – some very aggressive and some not so. These were only for the nimble traders with good risk management.
The Fine Print: This is only for educational purposes and is not a trading recommendation. Before employing any of these setups in your live account please understand the rationale behind them. Make sure that the risk level, max draw down, win ratio and average loss falls within your comfort zone and that you can withstand the draw down and the associated risk. Also read our disclaimer.