Tuesday, June 03, 2008

A Lesson In Technical Analysis

Over the last few weeks I've been able to make a few dollars trading the Dow strictly using my charts. In my opinion the Dow has been behaving very well technically so I figured this would be a good opportunity to give a quick lesson in technical analysis.

On May 19th the Dow made what looked like at the time to be a potential double top. Notice the resistance that took place at the 13150 level. What was very significant about the potential double top is that it took place right around the 200 day moving average. When a market makes a reversal pattern (double top) at a major moving average it is usually a very powerful signal.

On May 20th, the Dow sold off and broke the trendline (green line) which gives us even more confirmation that the dow has changed its trend from up to down.

On May 21st, the Dow sold off again and has now taken out the neckline of the double top formation which confirms once again that the trend has turned down.

May 29th the Dow rallied to the 12750 area which was a very significant level because the market has found support and resistance at this area 3 other times over the last 4 months. I marked off this area of support and resistance in the above chart.

Now the Dow appears to be heading lower. How much lower remains to be seen but i just wanted to take this opportunity to point out some very basic trading tools as it applies to the dow over the past few months.

For those of you who may be thinking that this is all hindsight let me just say I posted the above comments in real-time on this blog and you can read those comments by clicking here.

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