Dow Jones Index: Look Back At 8 Years Time Line

The best compass for the future is the past and the best way not to get lost on a trail is to constantly review the road map and to familiarize the terrain; therefore, let us travel 8 years back and study key paths the index has navigated so far.

The last US recession in 2001 we saw Dow Jones Index dropped 39.70% from its 2000 peak and the downtrend lasted 2.5years before the market recovered and went on a 4.5years bull run (FED Funds Rate then touched historic low of 1.00%). Good times don’t last forever and so the recent bull run reached its’ climax last October 2007.

The index suffered its’ deepest correction in 4 years when the market broke down from its’ bearish Head & Shoulder Pattern and consequently broke down from its’ major support trend line. However, the deep correction failed to penetrate through 2000 key historic high of 11,900 which served as the index first wall of concrete support, that level proved to be a stronghold as the index rallied from there and climbed back above its’ trend line, then the market regained 12,700 key level by knocking out its’ H&S Neckline Resistance, the index paused and consolidated a bit above the neckline before it jumped above 13,000 psychological level and closed the week at that level.

THE TERRAIN AHEAD

Looking at the chart, the index don’t have decisive resistance left in its’ way except for some pockets of potential obstacles: first is 13,200 level followed by Dec ’07 peak of 13,850 and lastly its’ all time high of 14,280. But this doesn’t mean the index will immediately take on these obstacles with the exception of the first obstacle as the market came a whisker close to 13,200 level last Friday’s intra-day high. As a matter of fact, traders should be on the alert of a possible strong pull back of the index to re-test 12,700 support level and it is very important for this support to hold for the index to rise further; otherwise, a broke below 12,700 support will mean a failed break-out of this key neckline resistance.

MARKET EXHAUSTION

6 out of the last 10 trading days, the index closed near its’ intra-day low this implies market exhaustion especially after its’ 2 months long rally. Moreover, looking at the chart more closely, the market could be developing a ‘rising wedge area pattern’ though it’s too early to conclude on this pattern hence further confirmation maybe warranted. Nonetheless, traders should be on the look-out for early signals of potential candlestick reversal patterns considering a re-test of 12,700 is imminent regardless of the purpose: whether to confirm a valid break-out of the index from 12,700 neckline resistance, or a set-up for further up trend to take-on the three potential obstacles.