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Written by G L, on 28-01-2008 18:18

Favoured : 19

Published in : Blog Section, My Take On The Markets

I published this article originally in January 28. The key levels are still valid and the interpretation still holds.

Article follows

DIA has to decide in the coming week if it is going to go down after a classical Head and Shoulders formation, or if it is going to break out off a flat correction.

Professional Traders Buying

The NVI (Negative Volume Index) seems to show that professional traders are betting the 500 Moving Average will hold and the Dow will not go down.

With the government pouring money into the economy like there is no tomorrow, they may have a good reason to bet this is the bottom of the short term bear market.

A break down under the 500 MA, with the 500 MA becoming resistance, would show that a new bear market is underway.

As I write this the president is promising making the tax relief permanent.

Let's see how the market responds tomorrow to tonight's presidential speech, and more importantly, what happens during the Fed meeting.

Again, if the political measures fail to inject money into the markets, it will be really hard to stop the selling avalanche.

Key Levels To Watch

If the current formation is not a classical head and shoulders pattern, the next key levels to watch on the DIA are

Previous low, 115.8

If DIA breaks down below that level and 115.8/116 becomes resistance for up-moves, we will have entered a new bear market.

Key Level 1, 126

It is common for head and shoulders and other classical patterns to make a counter move to throw off unsuspecting traders who buy thinking that the pattern failed. Another typical move would be a moment of indecision bouncing between 116 and 126 until traders without deep enough pockets are out of the market and the final move finally develops.

50 day moving average, now 130.44

Any break out to the upside will have to break above this level. A run up to the 50 day MA with failure to break out may produce a triangle between the 50 MA and the 500 MA.

If the price breaks above the Key Level 1 (126) and 126 becomes resistance, the Head and Shoulders pattern will be negated, and the next likely pattern to develop would be a flat (or rectangle) formation for a few months with a breakout to the upside.

That's my main trading hypothesis right now, and only a fall below 116 would negate it.

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