If I want to see a head and shoulder pattern, it’s there.
If I want to see a bullish flag, it’s there too.
Head and shoulder (HS)
I’m going to expore the HS pattern first.
June and July has closed below the neckline (in green), and that is one of the criteria of a successful formation of a HS.
However, July is a hammer.
Although the rally from May to July is accompanied by increasing volume, which is otherwise indicative of a continuation of the downward move, the last of the 3 candles moving down turns out to be a hammer.
That tells me that the sellers have sold all they want to sell to buyers looking for a bargain. Not a very bullish sign, but there’s a clear support preventing price from plummeting further.
I’m going to go backwards to Jan to take a look at the sentiment when volume'a at the year’s high.
Jan candle is the 3rd from DOW’s record high.
What stands out about Jan is the volume and the length of the lower shadow. By this time, price has come down on 2 consecutive months from DOW's highest point, and the size of the body of the first bearish candle is not very comforting. What’s more, the doji before it suggests short covering (when bears see that price is not continuing to go down, evident from the doji/hanging man on Aug 07) , NOT more euphoric buying.
(So you now have a market that’s at least not optimistic anymore. And if one were to look back at history, he’ll see only small bearish candles at minor pullbacks. The size of Nov 07’s candle suggests anything but a minor correction ahead)
The month that follows (Feb) shows a market that’s undecided: even the bears are not very sure that market has topped. Although price has opened below Jan’s close, the range has dropped substantially. When I look at this candle, then compare it with Feb’s candle, and then check the volume, I see that Jan is where the real fight between bears and bulls happens. By Feb, it seems players are pausing to assess where the market is going.
The 4 months spanning Feb - May seems to be a period of short covering and profit taking (when bears see that price is not going down further). There's clearly no renewed buying interest.
In June, selling picks up again.
In July, I see some buying interest.
When I put everything together, I see a market that wants to continue to go up. Price has at this time retraced to Fib level 61.8.
A hammer at Fib 61.8…hmmm….I have to say, it’s going to take a lot more for people to give up on the market. The set-up is simply not for a reversal YET. Not to below 10,000, and definitely not to 7250 (YIKES!!!).
So, here’s my take: though traditionally a bearish month, what I think we’ll see for Aug is going to be a bullish candle; my conviction further supported by the appearance of a bullish hidden divergence (see my earlier post for more on hidden and classic divergence) for period Mar 07 to July 08.
The divergence suggests that there’s still strength in DOW’s primary trend, which is UP.
Hence, what I’m seeing here is a HS that’s going to fail, which should send DOW up.
Bull Flag
The uptrend is even more pronounced if I were to build my hypothesis on the premise of a bullish flag.
Granted that DOW is currently caught in the downward channel of the flag, volume is declining as the channel develops.
Setting aside the issue of a breakout above the channel for the time being, there’s currently at least still room within the channel for price to move up.
Supported by a hammer, what I see for Aug is clearly a month that’s going to end up in the positive territory.
DOW WEEKLY
What I see is a failed head and shoulder (price break above resistance formed by neckline in green), and the forming of a bearish wedge.
Judging from the volume, what I can say is that the rally is not supported, but it doesn’t tell me that price will not continue to inch up with even lower volume for the week ahead.
I can’t tell from my weekly chart if we’re going to end up with a gain or a loss for the week.
Now, let’s see: I’m bullish for the month, we have 2 more weeks to go, and we are still in bullish region. If this week turns out to be bearish, we could end up with a loss for Aug since we can’t pin our hope on the last week of Aug (generally DOWN).
So, the week of Aug 18 will have to see a gain for a bullish Aug to happen.
But without more information (eg. news), I'm just going to say for now that I'm expecting DOW to trade within the range of 11,500 to 11,900 for Aug 18 - 22.
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