DOW: Weekly & Daily Chart Analysis & Inverted Scallops

DOW WEEKLY

It appears to me that we are now in wave 4 - put another way, it simply means we have yet to see the bottom.

The bottom could be at 6975, which is DOW's previous low (formed in Oct 97), or at around 6000, which is the completion of the 2nd leg of a measured move down in the daily chart (refer to weekly chart above). Details under "DOW DAILY" below.

DOW DAILY

I see an Inverted Scallop developing (the arc in the above chart is the best arc that I can draw...do give it your best shot to visualize a smooth arc that joins the price peaks - that's the shape of a typical Inverted Scallop - although sometimes you will have to use the low, rather than the peak, of the candles to see the arc...you get the drift...)

I personally had found the Inverted Scallops comforting to see in a downtrend during those times that I had entered a LONG position prematurely. It's about the only other pattern that will successfully reverse price (the other pattern is the double/triple bottom that has either hammers or morning stars, or piercing patterns at the bottom - I personally don't trust the harami - but that's just me), especially on intraday basis. Again, that's my personal experience - if I want to see a scallop, I will see a scallop, and I set my stops and targets based on this particular pattern that I have identified.

And since according to Bulkowski (author of Encyclopedia of Chart Patterns), when Inverted Scallops form in a downtrend, it is usually found in the corrective phase of a measured move down (which is what we are seeing on the daily chart now), I know that my odds are getting better that the pattern forming is indeed an inverted scallop.

So, assuming that we are now indeed in wave 4, and assuming that wave 4 ends at 10,700 to 10,800 (refer to daily chart above - 10700 is derived from fib extension; 10800 is visually a resistance), the way it's going up could be via successive Inverted Scallops. A sign of exhaustion of this corrective wave up would be the narrowing of the width of each successive scallops (ie. it takes increasingly shorter time for scallop patterns to complete)

Assuming that price indeed turned back down from there, completing wave 5, which is also the 2nd leg of the measured move down, my target, if I was shorting, would be around 6975 (previous low in Oct 97), or 6000 (performance target for measured move down).

Random Thoughts: picking tops and bottoms & daytrading and swing trading

Having said all of the above, and truth be told, no one can say for sure where the bottom is going to be.

As far as I'm concerned, I'm going to go with the assumption that DOW's going to go as low as 6975, or 6000, or even lower, before it will make a solid bounce to reverse the downtrend that began in 07 (I'm just going to ignore - for now - the arguement that the downtrend actually began way before that and that the rally that we saw prior to Oct 07 was merely a bear rally).

That's the easier scenario - ie. DOW to confirm a bottom, and the market simply looks to trade up from that point until it touches its previous peak at 14200.

Should DOW punch through 6000, or 5000, I'll be prepared for a very difficult trading environment, not unlike the one I've experienced for the past few weeks. The reason is straightforward: prices would be too low to make selling comfortable or even natural for that matter, and the risk involved in going long without having seen an established bottom first is too high to buy - most are going to think like that, and that kind of collective sentiment could create some really freaky looking charts like the ones we've seen on the awfully choppy days lately.

All in all, as a daytrader, my concern is NOT so much about market's trends as it is about the SENTIMENTS surrounding surprises along these trends. Using the above as an illustration, should the majority expect DOW to plunge beneath 5000, then a rally -if it happened -could be a difficult one comprising choppy days and steep downward moves. In this case, taking the side of the bear, and getting aggressive on days plagued by bad news and econ data would be the way that I would go about trading the TF in particular (to use the analogy of poker, this will be the round where I'll go "ALL IN").

For now, it's clear that the market wants to go up. For how long, I don't quite care. I just know that no one knows for sure, everyone's guessing, and constantly looking for the more enlightened to provide some solid answers, and the smallest surprise will send the market drifting in all kinds of directions. Here I am, just scalping away daily - taking my few ticks per scalp - while watching for price to be stopped, turn around, and go back down to find its real bottom this time.

Again, the bottom could be 6000, or 5000, or maybe even 2500 - according to some seriously grisly bears (yup, that included me at one point) - and precisely because I don't have the SLIGHTEST inkling where price will stop nosediving, I'm going to continue to daytrade and scalp only, until I see that it makes sense for me to hold my trades longer. (It wouldn't make sense for me to take trades I'm not comfortable with. But it could make perfect sense for someone less risk averse/more aggressive/better capitalized to actually buy-and-hold, or sell-and-hold RIGHT NOW. There's really no one way to go about trading this market.)

For me to really believe that the market has bottomed, I would have to see successive bullish patterns developing above the 6000 to 6975 support. That's the only way I can be assured that the odds of DOW breaking above its high at 14200 have indeeed increased.

Since market's closed for holiday today, I'm going to take the chance to do something really terrible later - skate with a flu. If I keep believing that I'm sick, I will continue to be sick. That's the way my body works.