More about the Diamond Pattern from Ed Downs.
Updated Wednesday, 5/3 for Thursday's Market
Key DOW Levels for 5/4
UP Through 10,600
DN Through 10,400
Tighter..
Dropped to Critical Support. Now, trade the breaks or
rallies in the very short term.
"Which way will it break? .. the bias has to be to the
downside, simply because we are forming a Diamond in the
Weekly Chart." - Tuesday, May 2
Break we did. And, we dropped all the way down to 10,500 -
actually going as low as 10,400 before reversing slightly.
If you look at the Daily Chart, you can see that we are
definitely "in the zone" of the lower trendline on our
Triangle formation, which we will talk about again in a
minute.
The NASDAQ also pulled back, to test the 3,600 level - ON
THE NOSE. This is critical support on this index. The fact
that we reversed precisely at this level is indicative of
some buying pressure in the short term. We'll discuss the
prospects for a very short term rally in a moment.
Finally, the SP Indexes also pulled back to their critical
support levels of 760 for the SP 100 and 1,400 for the SP
500. So, we are basically "four for four." All indexes
have dropped to critical support. Now, we all want to
know, "Will we break through, or will we bounce and rally
tomorrow?"
If you are a short-term trader, I hope you shorted the
market as we dropped through 3,750 or 10,700 on the Dow.
If you did, you made a nice chunk of change today. And, I
also hope you exited at the close, when the market reversed
off critical support levels.
If you can watch the market closely, I would go Long
tomorrow with any rallies, looking for a 200 to 300 point
move (wait 30 minutes after the Open). BUT, I would exit
Longs and go short if we drop through these critical levels
again. In the short term you have little downside risk
going Long because we are sitting precisely on the support
levels, which means you can set tight stops.
Now, if you are a medium to long term trader, and can't
watch the market intraday, trading becomes more difficult.
Right now, you should be Short, from our discussions and
drops a few days ago. I would consider exiting my Shorts
if we rally back through 3,700 on the NASDAQ and/or 10,600
on the Dow, and then stay out of the market until we rally
back through 4,000 or 11,000 on the Dow, or drop through
3,400 or 10,400. These numbers are designed to catch "the
big moves". The only way to catch the swings is if you can
watch what happens intraday. But I do think moves through
any of these numbers will result in nice profits in the
direction of the move.
To summarize all this, I think the "really big play" would
be a drop through the lower boundary of the triangle you
can see in the Daily Chart on the Dow. The triangle is
winding up like a top. If I'm right, the pattern is going
to "complete" within the next week and result in a further,
dramatic drop. As a medium or long term trader, the ONLY
way I would go Long is if we rally through the top of the
triangle at about 11,000 on the Dow.
Getting back to the Short term, I think we have a good
chance to see a rally tomorrow and Friday, but I think it
will be short lived. Going Long at this juncture is risky
unless you can really watch the market. If you can, then
it's O.K. to get on board on the gamble that the patterns
will not complete - but just be sure you are ready to pull
out - FAST - if we cross 10,400 on the Dow or 3,600 on the
NASDAQ. And then, go short, naturally!
I'll tell you, I've never seen a clearer diamond formation.
It's very, very exciting.
Thanks for listening, and good luck in your trading...
Ed Downs
edowns@nirvsys.com
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LINKS TO CHARTS:
60 Minute Chart
signalwatch.com
Daily Chart
signalwatch.com
Weekly Chart
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